In a purely cooperative world, construction contracts would be unnecessary. If the owner or contractor caused a problem, the party would admit fault and make amends. Unfortunately, we do not live in a purely cooperative world. Owners and contractors have adverse interests, and responsibility for problems is not always clear. When a dispute arises, the construction contract provides rules for resolution.

Construction contracts typically include procedural provisions that incorporate an element of time. For example, the owner or architect must respond to submittals and pay applications within a specified time. If the contractor wants to make a claim for more time or money, it usually must give notice to the owner within a stipulated time of learning the facts underlying the claim, and it usually must follow up its notice with substantiating information.

Time limits on claims have a reasonable purpose: the owner wants prompt notice of claims so that it can help look for efficient solutions. Potentially expensive problems can sometimes be mitigated by paying for additional equipment or labor, by making a design change, or by resequencing work.

However, time limits can be a trap for the unwary. Project personnel may be more focused on getting the job done and solving problems than on formal notice requirements. A cooperative owner may overlook the absence of formal notice and participate in informal claim discussions. Be careful: even if the owner ignores notice requirements during the early stages of a project, it may decide to enforce them later as claims get bigger. Many construction contracts have a clause addressing this situation that says in effect: “The fact that the owner did not enforce a particular provision on one occasion does not affect its right to enforce that provision later on.”

Here are some common examples of time limitations relating to contractor claims:

• If the contractor discovers differing site conditions or hazardous materials, it shall give written notice to the owner within seven days and before such conditions are disturbed. The notice shall describe the conditions and state when they were discovered.
• If the contractor believes that some direction by the owner or architect will delay its work or make it more costly, it shall give written notice to the owner within 10 days, identifying the direction in question and when it was received.
• If the contractor has given notice of a claim for additional time or money, it shall follow up within 14 days with a detailed explanation of the basis for the claim, citing all relevant contract provisions, and an estimate of the expected impact on the contract time and contract price.

In some states and under some circumstances, the failure to comply with notice requirements can limit the right to bring a claim or bar a claim altogether. In other states, late notice may be excused if the party receiving notice was not harmed (e.g., if it knew about the issue before the formal claim was submitted).

To avoid a procedural trap, consider establishing a procedure to track and comply with time limits. Take time in daily or weekly project meetings to discuss potential claim issues. Report any claim issue involving significant time or money in writing to project management and identify any applicable time limits for response. Given the short time frame allowed for certain kinds of claims (seven days for differing site conditions is common), project management should give all claim issues prompt attention and submit timely notice if appropriate. To facilitate a quick response, provide project managers a template for sending notices. Once notice has been given, project staff should be assigned to prepare a more detailed notice of impact, if the contract requires it.

Sometimes claims cannot be submitted on the schedule defined in the contract. For example, when differing site conditions are discovered, their scope may not be known right away, and the cost of dealing with them may not be known until a mitigation plan is developed and approved by the owner. In such a case, the contractor should give timely notice, including its best estimate of the impact, state that the estimate may change, and update the notice as new information is obtained.

The beginning of a year is a good time to review contracts, identify the provisions that are subject to time limits, and make sure that project representatives have procedures in place to identify and comply with those limits. May you have a happy and timely New Year!

Karl Oles is a Stoel Rives LLP partner and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7535 or karl.oles@stoel.com.

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

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Here are some ideas about how contractors can manage risk through a construction contract. These ideas may be useful to owners as well.

One foreseeable risk is breach. If a contractor’s work is defective, the owner may pay others to fix it. This may cause delay that affects the owner’s profit or other business opportunities. The owner’s cost to fix the work is “direct” or “general” damages. Its lost profit and opportunity would be “indirect” or “consequential” damages. Direct damages are usually predictable; consequential damages may not be.

To manage risk of breach, a contractor may ask the owner to limit its potential claims to direct damages and to waive claims for consequential damages. Unfortunately, the direct/consequential distinction is not clearly defined in the law. Contractors should think about what damages are foreseeable. If the owner plans to rent space in the building, delayed completion will affect revenue and extend the time that the owner must pay interest on its construction loan. Consider addressing these specific risks in the definition of “consequential damages.” The owner may ask that a waiver of consequential damages be mutual. In that case, a contractor should think about its potential damages (if the owner delays work) and address them specifically.

Consider limiting damages by amount rather than (or as well as) by type. The contract could provide that the contractor’s maximum liability to the owner be capped at a stated sum. Of course, a major element in the management of risk is insurance, so the owner will probably want any damages limitation to take insurance into account, as well as leaving the contractor with some “skin in the game.” Here is an example of a damages limitation provision:

The contractor’s maximum liability to the owner shall not exceed the sum of (a) the amount paid by the contractor’s liability insurer and (b) the contractor’s fee.

This provision leaves the owner at risk if the contractor fails to maintain insurance or if the policy is eroded by other claims. Those risks could be addressed through modified language. Notice that, even if enforced, the above provision would leave the contractor exposed to claims by third parties, such as parties injured on the project.

Another way to limit the amount of damages is through “liquidated damages,” by using a provision like the following:

If the contractor fails to achieve substantial completion by the deadline set forth in this agreement, the contractor shall reimburse the owner $____ for each calendar day until substantial completion is achieved.

This provision could be combined with an overall cap on potential damages.

Liquidated damages are most often used in the context of delay but can be used in other ways. A piece of mechanical equipment or an assembly may be warranted to have a certain output if it is supplied with power meeting certain requirements. The output warranty could include liquidated damages to be applied (perhaps on a sliding scale) if the equipment or assembly fails to perform as specified.

Another risk is that a contractor’s work may turn out to be more difficult than expected. Bad weather, a pandemic, or rising material prices may upset the contractor’s budget. If the work involves excavation, unforeseen underground conditions may make it more expensive. A contractor can guard against unknown risks by including a contingency amount in its bids. But this raises a problem for the owner. If difficult conditions are found, the owner may be willing to pay, but it doesn’t want to pay the contingency amount if conditions are good. What can be done?

One approach is for the owner to shift some of the risk to itself. For example, the owner can tell the bidders: “You should calculate your bid on the assumption that there will be no more than three days on which snow affects access to the site; if there are more than three snow days you will be entitled to an increase to the contract price.” Similar provisions can address material price escalation and “force majeure” events like pandemics.

For big infrastructure projects, owners typically direct bidders to assume that certain underground conditions will be found; the intent is to minimize bid contingencies. If the owner’s information turns out to be correct, fine. If the information turns out to be incorrect, the owner will pay more, but only if difficult conditions are found.

The foregoing comments only scratch the surface about how construction contracts can anticipate and manage risk. Particularly for large and complex projects, it pays to think ahead and tailor one’s contract to the risks foreseen.

Karl Oles is a Stoel Rives LLP partner and a member of its construction and design practice group. Contact him at 206-386-7535 or karl.oles@stoel.com.

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

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The roles of designers and contractors are being combined for more and more construction projects. This approach has benefits, but it also creates risks.

One traditional method of project delivery is called “design-bid-build.” The owner retains an architect to prepare a design, and then it retains a contractor to build according to that design. This method is well-suited for public projects in which multiple contractors are solicited to bid based on a completed design.

An alternative method is for the owner to hire a contractor (a “construction manager” or “CM”) during design development to provide advice about constructability, budget and schedule. The CM enlists major subcontractors at this early stage to collect information about preferred design details and probable cost. This CM method is intended to align the contractor with the designer to reduce claims based on design defects, and it can result in a more informed budget and schedule than design-bid-build.

A third method is called “design-build.” The owner hires a contractor/designer team, provides performance requirements for the project, and allows the team freedom to design and build the project to meet the stated requirements. In this method, the contractor and designer are closely aligned, which should limit claims of design defect, and work on the project can begin while the design is being developed. This method can work well for infrastructure or industrial projects in which technical performance is more important than appearance or amenities.

The foregoing methods are not exclusive. Different projects may include different roles for owner, designer and contractor. In design-bid-build, it is common to leave the design details for mechanical, electrical and plumbing as well as fire protection systems to specialized subcontractors. On the other hand, even in design-build the owner may retain control over certain design aspects.

Each method of project delivery offers advantages. However, involving the contractor in design, as happens in CM and design-build, can create risks. A project participant may fail to understand and carry out its responsibilities. For example, a contractor hired for a CM project may lack experience in pricing a developing design or analyzing it for constructability. A CM project architect may not realize what is involved in working with a CM and may defer to its preferences. An inexperienced owner on a design-build project may be tempted to intrude into design decisions without recognizing that by directing design matters it is incurring risk.

Because of the various ways that owners, designers and contractors can interact, it is important to have a clear understanding about each party’s responsibilities and to express that understanding in clearly written contracts.

In design-bid-build, the responsibility for design rests entirely (or mostly) on one party – the designer. In the CM and design-build methods, the responsibility for design is shared, so there can be misunderstandings about who is doing what, particularly when multiple parties have contributed to design decisions.

On a CM project, for example, suppose the owner wants the exterior of the building to have a series of attractive planter boxes. The architect may depict those boxes on the plans, expecting the contractor to detail them. But the contractor may say, “Wait; those boxes could be heavy and they need to drain. The architect needs to figure out how to support them structurally and where the drains should run.” On a design-build project, the owner may specify that the structure must meet the seismic code but then reject the design-build team’s analysis of how the code applies and require significant design changes – thus causing a delay.

The best protection against these risks is design coordination, which begins with a clear understanding of roles and responsibilities and continues with open communication. On CM and design-build projects, the contractor and designer must work together to detect and resolve problems and conflicts.

The contractor’s role is particularly important. During the design phase, it should be preparing a comprehensive plan for constructing the project. This includes identifying work packages for subcontractors, ordering long-lead materials, and preparing a cost-loaded schedule so that critical activities can be identified and tracked. Having this constructability focus informs the contractor’s comments on the developing design and gives the owner early notice of issues that may involve a trade-off between project quality, on the one hand, and budget and schedule on the other.

To reap the benefits of getting the contractor involved in design, provide for and recognize the risks.

Karl Oles is a Stoel Rives LLP partner and a member of its construction and design practice group. Contact him at 206-386-7535 or karl.oles@stoel.com.

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

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Late last year, the Washington State Department of Transportation (WSDOT) and Seattle Tunnel Partners (STP) engaged in a nine-week trial of claims arising from construction of the new State Route 99 tunnel under downtown Seattle. One major issue for the jury was whether STP had encountered “differing site conditions.” To understand the issue, let us begin with the legal background.

Traditionally, contractors bidding on public work were responsible for completing the work for the agreed fixed price despite unexpectedly adverse conditions. Experienced contractors addressed the risk of unknowns by adding “contingency” margins to their bids. Public agencies realized that they were paying to manage risks that might not become actual, so they looked for ways to lower bids by accepting some of those risks.

One important variable for infrastructure projects is the nature of subsurface conditions. What lies beneath the surface may differ from what is visible. It was common for public contractors to include contingency in their bids to deal with unexpected underground conditions. In response, public agencies began to include subsurface information in their contract documents and promised to compensate the contractor if actual conditions differed materially from the information provided. This way, the agency would pay for unexpected conditions only if they were found.

Differing site conditions are usually defined as unknown underground conditions that differ materially from the conditions indicated in the contract documents. To lower bids, public owners promise to compensate the contractor if the work is delayed or made more expensive because of the presence of differing site conditions.

The Seattle project included a tunnel almost two miles long. Over several years, WSDOT retained consultants to study the subsurface conditions. Among other things, the consultants performed “pumping tests” – pumping water out of one well and monitoring the groundwater levels in nearby wells. If a nearby well was affected, that was evidence that granular, permeable soils would be found between the pumping well and the monitoring well.

In December 2013, STP’s tunnel boring machine ran into a steel well casing that had been installed in 2002 for a pumping test. The tunnel boring machine stopped advancing two days later and STP blamed this on the well casing. Assuming STP correctly identified the cause of the stoppage (WSDOT disputed it), the critical question was whether the well casing was a differing site condition – that is, whether it was materially different from what the contract documents indicated.

The first document of interest was the Geotechnical and Environmental Data Report (GEDR), which, as the name implies, contained data about subsurface conditions, including soil borings, laboratory tests and pumping tests. The GEDR included a map showing the well casing (identified as “TW-2”) but it did not say what it was made of. Most of the wells described by the GEDR were identified as being made of PVC. STP argued that this was an indication that TW-2 was made of PVC also, and that TW-2’s steel construction was materially different. One problem with this argument was that all of the PVC wells were installed in 2009-2010, while TW-2 was installed in 2002, so it was questionable whether the discussion of PVC wells was intended to convey any information about TW-2.

A second document of interest was the Geotechnical Baseline Report (GBR). This document drew conclusions about underground conditions based on the data in the GEDR. The GBR was silent with respect to TW-2; in fact it did not describe the construction of any well. However, it identified “obstacles” at various locations around the site. STP argued that because the GBR did not identify TW-2 as an obstacle, this was an indication that TW-2 was not made of steel, because a steel well would have been an obstacle. One problem with this argument was that the GBR’s discussion of obstacles appeared to focus on construction debris (things abandoned in the ground like concrete and wood pilings) and not instruments like wells.

This has been a necessary simplification of the evidence presented at trial about TW-2, the GEDR and the GBR, but enough has been said to illustrate what turned out to be the key issue: whether TW-2 was a differing site condition. That in turn depended on what the GEDR and GBR indicated. The jury considered this question and concluded that TW-2 was not a differing site condition. That was the basis of the jury’s verdict in WSDOT’s favor.

Karl Oles is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 206-386-7535 or karl.oles@stoel.com.

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

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The interaction between business people and lawyers can be productive or frustrating, depending on whether there is good communication and a shared understanding. Consider this conversation between a business manager (Murphy) and a lawyer (Landry):

Murphy: We are developing a data center and I want to get you on board.

Landry: Thanks for thinking of us. What can we do?

Murphy: You are the expert on this legal stuff. What do you propose?

Landry: Well, a project like this will have legal and technical challenges. We can help with the legal side. For example, do you need to confirm that your property is properly zoned? Do you need help with a financing agreement? Do you need a contract for the design engineer, the construction contractor, the vendors providing specialized equipment, the inspection company, or the utility providing power and water? Do you need advice about how to structure the deal to maximize favorable tax treatment?

Murphy: Those are all good thoughts. I’m concerned though. I worked on a deal with another lawyer before. He did a lot of things I didn’t need and charged me too much.

Landry: If we work together and have a clear understanding of what you need, I can work efficiently. What are your plans for the engineer/designer?

Murphy: We have already signed an agreement with a designer.

Landry: Is that an agreement you have used before?

Murphy: No, it’s new. I have not read all the fine print.

Landry: I can review that contract and highlight issues deserving attention. I have seen a lot of engineer contracts and I know what kinds of provisions can cause trouble.

Murphy: Is that really necessary? If difficult issues come up, can’t we just work them out?

Landry: Particularly with someone new, it’s good to remember that a written contract is like a life preserver: you don’t use it much until something bad happens. The contract provides agreed rules to resolve disputes in case your relationship becomes unfriendly.

Murphy: Do we need one of those contracts with a million clauses?

Landry: No, but it’s a good idea to provide for issues that are likely to arise: scope of work, schedule, payment, managing changes in the work, managing claims by third parties, etc. But one should beware of going too far. The contract needs to be usable.

Murphy: We haven’t chosen a contractor yet. What would you recommend about that?

Landry: You are the best person to choose contractor candidates. I can provide a form of construction contract that the candidates can refer to when they make their proposals.

Murphy: What is your approach to writing a construction contract?

Landry: I identify risks and assign each risk to the party best able to manage it. For example, the contractor is in the best position to make sure the work is done properly, so the contractor should correct defective work. You are providing the design, so you should be responsible for defects in the design (you may be able to go back to the designer for relief).

Murphy: What about risks that neither party can manage, like unfavorable underground conditions? Can we shift those to the contractor?

Landry: If you do that, then the contractor proposals will include a contingency to cover that risk, which means you will pay whether or not unfavorable conditions are found. It may be better to establish some baselines about what conditions the contractor can expect and to be prepared to pay extra for conditions outside those baselines. That way you pay only if unfavorable conditions are encountered.

Murphy: What do you think about shifting as much risk as possible to the contractor?

Landry: There are at least three problems with that approach. First, a competent contractor may refuse to make a proposal on an unfair contract. Second, your own staff may refuse to enforce what they consider to be unfair provisions. Third, an obviously unfair contract may not be enforced by a court or arbitrator. In my experience, it is good business to be able to say to the contractor, “Here is a contract that I would accept if I were in your shoes.”

Murphy: How do we combine my technical items with your legal terms?

Landry: I usually put general terms first and refer to appendices that contain the technical details for a particular project.

Murphy: That sounds good. Things do go better when we work together!

Karl Oles is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 206-386-7535 or karl.oles@stoel.com.

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Contract claims and negligence claims are subject to different statutes of limitations. In Washington, claims based on written contracts must be commenced within six years of the claimed breach of contract. Claims based on negligence must be brought within three years of when the plaintiff discovers (or with reasonable diligence could discover) the facts underlying the claim. For example, if a company negligently designs a ladder so that it collapses and causes injury months later, the three-year statute of limitations begins to run only after the injury has occurred. Not all cases are that simple, however, as the following case illustrates.

A contractor was building a highway tunnel in downtown Seattle. After mining about 1,000 feet, the contractor discovered that its tunnel boring machine was damaged. The contractor blamed the damage on a steel well casing that, it said, the project owner should have disclosed. The owner replied that the well casing was disclosed in a report written by its engineer. The contractor claimed the report was incorrect and failed to give adequate notice of the well casing.

The contractor first asserted a claim for breach of contract against the owner and later decided to add a claim for negligence against the engineer, but the negligence claim was filed more than three years after the tunnel boring machine encountered the well casing. The engineer moved to dismiss the contractor’s claim based on the statute of limitations. When the trial court denied the motion, the engineer asked the Court of Appeals to review the matter. Although the Court of Appeals rarely interferes in ongoing lawsuits, it agreed to review whether the trial court should have granted the engineer’s motion. In its review, the Court of Appeals will consider when the contractor discovered the facts underlying its negligence claim.

The contractor argues that, while it quickly concluded the well casing was one possible cause of damage to its tunnel boring machine, it did not become confident of that conclusion until weeks later. Meanwhile, the contractor struggled to make the tunnel boring machine work until finally stopping it for repairs less than three years before filing its claim against the engineer.

The following principles will be relevant to the appellate court’s review:

1. The three-year limitations period begins to run as soon as a plaintiff knows enough facts to support a lawsuit, usually as soon as the plaintiff knows it has been injured. So it will be important to determine when the plaintiff claims the tunnel boring machine was damaged by the well casing and when it knew of that damage (or could with diligence discover it).
2. For the three-year limitations period to begin to run, the plaintiff must know (or with diligence be able to discover) that the defendant is connected somehow with the injury and may be responsible. This will not be an important factor here because the contractor had the report it now claims was incorrect or misleading and the engineer was listed as the author of the report.
3. The limitations period does not wait until the plaintiff is able to prove its case against the defendant. The statute of limitations applies even to cases where the plaintiff’s claim fails and it turns out that the defendant did not cause any injury at all. To set the limitations period in motion, all that is needed is enough information to support a claim of injury and the defendant’s connection to that injury. Once the limitations period begins to run, the plaintiff has three years in which to gather information and prepare to prove its case. So it is not sufficient to say, “I believed the defendant had caused my injury, but I wasn’t sure.”

The foregoing general description of issues apply to Washington State Department of Transportation v. Seattle Tunnel Partners – a Court of Appeals case. Observers interested in finding out the appellate court’s ultimate ruling may wish to monitor that case.

Enough has been said to indicate that the statute of limitations can create serious risks and raise interesting questions about which parties can disagree. The bottom line is that it is better to be safe than sorry. If you believe you have been injured by another party, it is prudent to consult with an attorney to figure out what claims you may have, what statute of limitations applies to those claims, and when the limitations period may run out, leaving no remedy available.

Karl Oles is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 206-386-7535 or karl.oles@stoel.com.

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A classic joke about Washington law was that all court decisions in the state could be explained using three rules: 1, Washington is a lien theory state (for mortgage law); 2, Washington is a community property state (for family law); and 3, Boeing wins. Construction and design firms may be more interested in the following distinctive features of Washington law.

1. RCW 4.24.115 limits the use of indemnity clauses in construction contracts. It basically says that an agreement by which X must indemnify Y against liability arising from X’s work (a) is unenforceable when the liability is caused by Y’s sole negligence, and (b) is enforceable only to the extent of X’s negligence in the case of concurrent negligence of X and Y. In response to this statute, many Washington construction practitioners have developed indemnity clause language that tracks the statute, like the following:

To the extent permitted by law, X shall indemnify and hold harmless Y from all claims asserted by third parties arising from X’s work on the project or from injury or death to any person or damage to any tangible property, and from costs incurred, including reasonable attorney’s fees and litigation costs in connection with such claims, but only to the extent the underlying injury, death or damage was caused by the negligent act or omission of X in connection with its work under this contract.

2. RCW 4.24.115 contains another clause that may be puzzling: an indemnity agreement “may waive the indemnitor’s immunity under industrial insurance, Title 51 RCW, only if the agreement specifically and expressly provides therefor and the waiver was mutually negotiated by the parties.” Why would anyone want to waive immunity under the industrial insurance (workers’ compensation) laws? The answer can be seen in the following scenario. Suppose that a contractor agrees to indemnify the owner against third-party claims for personal injury, and then the person injured is the contractor’s own employee. The contractor is immune from direct liability to the employee under the workers’ compensation laws. If the injured worker sues the owner and the owner seeks indemnity, the contractor may argue that indemnity should not be available in this case because it would defeat the statutory immunity. RCW 4.24.115 says that this potential defense can be waived. Again, Washington construction practitioners have developed language that tracks the statute, like the following:

X agrees that the provisions of this indemnity clause apply to any claim of injury or damage to tangible property asserted by X’s employees. As to such claims, X’s obligation of indemnity under this indemnity clause shall not be limited by any limitation on the amount or type of damages, compensation, or benefits payable to the employee by X under workers’ compensation acts or other employee benefit acts. Only to the extent necessary to fulfill its obligations pursuant to this indemnity clause, X, by mutual negotiation, hereby waives any immunity that would otherwise be available regarding claims brought by its employees under the industrial insurance provisions of Title 51 RCW.

3. RCW 4.24.360 bars any clause in a construction contract that “purports to waive, release or extinguish the rights of a contractor, subcontractor or supplier to damages or an equitable adjustment arising out of unreasonable delay in performance which delay is caused by the acts or omissions of the contractee or persons acting for the contractee.” This statute was intended to prohibit “no damages for delay” clauses that courts had previously enforced. The statute goes on to say that it does not bar provisions that provide for “reasonable liquidated damages” for delay. This suggests that, while an owner may not “extinguish” a contractor’s right to damages for delay, it can define those damages (e.g., by limiting recovery to direct costs and an agreed markup). The meaning of “persons acting for the contractee” was explored in Scoccolo Construction, Inc. v. City of Renton.

4. RCW Chapter 60.04 contains Washington’s lien law for private construction projects. Public projects have analogous protections for persons providing work, including a mandated payment bond (in RCW Chapter 39.08, the “Little Miller Act”), and a requirement that the public agency withhold retainage (in RCW Chapter 60.28). Both the private and public project statutes have detailed notice and timing requirements. Fortunately, Stoel Rives has produced a (including the public remedies) that is available through our website.

There are of course other Washington laws that affect construction projects. To learn more, contact one of the many lawyers in Washington who would love to help.

Karl Oles is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 206-386-7535 or karl.oles@stoel.com.

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When drafting a construction or design contract, it is easy to be carried away by enthusiasm: “This is going to be an exciting project, and we are all going to make money!” It is tempting to fill the contract with provisions about how the parties will work together, consult with one another, and make consensus decisions.

At such moments, the construction lawyer can feel like the slave in the Roman triumphal procession whose job is to whisper to the victorious general, “memento mori,” which means roughly “remember that failure is an option.” This is valuable advice in the construction/design context. As long as the parties get along and the project is successful, a written contract is hardly needed because everyone agrees about what should happen next. But when the project becomes troubled and the cooperative relationship falters or is destroyed, a written contract can provide a prearranged path forward despite disagreement. It follows that design and construction contracts should be written hoping for the best, but planning for the worst. The following examples are illustrative.

Design meetings

Design professionals promise to meet with the owner during the design and construction phases. This promise hardly needs to be written down if the project is progressing well, but problems can arise if the owner feels that proposed designs fail to meet its needs, the designer feels that the owner simply can’t make up its mind, and the meetings multiply. Who pays for the extra meetings? One possible answer is to define a certain number of meetings as “basic services” and pay for more meetings as “additional services” unless more meetings are needed to correct designs that were inconsistent with the owner’s written program, but the point is to think about and plan for this contingency before it occurs.

Schedule submissions

The contractor is required to submit periodic schedule updates. The owner has a right to review and approve each updated schedule, and even has a right to withhold payment until an acceptable schedule is provided. However, the schedule may be subject to good faith disagreement, and many owners are reluctant to withhold payment simply because such a disagreement exists. But the owner needs a reliable schedule. What can the owner do, short of refusing payment, if the contractor fails to submit reasonable schedules? One approach is to refine the schedule requirement and impose a modest penalty for failing to meet that requirement (or pay a modest incentive for meeting the requirement). Again, the point is to plan for this contingency while the parties are still on good terms.

Claims

To pursue a claim for additional money or time, the contractor must give timely notice, clearly state the remedy sought, and submit backup documentation. This procedure does not need to be written down if the parties are working collaboratively, but it may work poorly if the parties are arguing about large amounts of time or money. A provision requiring the contractor to make a clear statement of claim (intended to prevent a change of theory later on) may have the perverse effect of eliciting only vague statements and reservations of rights because the contractor doesn’t want to be boxed in. But vague statements don’t lead to settlement, and the claims pile up. One approach (adopted in the current AIA documents) is to use an independent “Initial Decision Maker” to review disputes. This procedure is not uniformly successful, but at least it begins from a realistic recognition that a situation can arise where the parties need help to make constructive progress on pending claims.

Dispute resolution

Design and construction agreements often provide that disputes will be addressed in an escalating fashion: discussions among field people, discussions among higher-level party representatives, mediation, and then either arbitration or a court proceeding. This is the sort of thing that experienced parties do even without a written contract. Surprisingly, some dispute resolution provisions prove ineffective if the parties actually have a serious dispute. What if one party refuses to meet, participate in scheduling a mediation, or help choose an arbitrator? One solution is to provide time limits (e.g., if the parties do not agree to a mediator within 30 days after the request for mediation is made, the mediation step can be skipped); another is to provide a backup method for choosing a mediator or arbitrator (organizations like the AAA have rules for this).

These are not detailed solutions, but they indicate how, by planning for the worst, parties can increase the chances of ultimate project success.

Karl Oles is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7535 or karl.oles@stoel.com.

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In recent years, the requirement that public owners use only the “design-bid-build” method for project delivery has been relaxed. Instead of preparing a design and then selecting a low-bid contractor, public owners in Oregon and Washington (and elsewhere) now have the option to hire a single design-builder based on qualifications and experience. Combining design and construction responsibilities, it is hoped, will allow better designer-contractor collaboration, shorten the total time needed to complete a project, and reduce contractor claims.

Design-build is growing in popularity with public owners, but it presents challenges and potential pitfalls for the unwary. Here are some comments and cautions.

Owners

Public owners need to understand the scope of their legal authority to use the design-build method. Both in Washington and Oregon, certain public owners must get approval from a state board before using this method. There is an application process, which should be built into the project timeline.

A public owner begins a design-build project by preparing a request for proposals (RFP) that will be used to solicit proposals from design-build teams. The RFP is a specialized document that should be prepared under the supervision of people with training and experience in design-build.

The RFP sets forth how the project is intended to function and provides measurable criteria (e.g., “the lobby must accommodate at least 100 people”). It includes any site investigation reports and highlights any special constraints (e.g., “the new wing should be architecturally compatible with the existing building” or “Colorado Boulevard must be open to parade traffic on Jan. 1”).

Owner requirements and constraints should be minimized so that the design-build team has maximum opportunity to deploy creative ideas. The RFP should include the proposed design-build contract.

The owner then selects a design-build team based on the qualifications and experience of the contractor and designer, as well as key subcontractors and subconsultants, which are scored according to announced criteria. The review process should be planned and carried out by owner staff with training and experience in design-build. The selection process should protect the intellectual property of the various proposers.

The owner should resist the temptation to turn the selection process into a full-blown design competition. Otherwise, the cost of proposing may drive qualified design-build teams away. One emerging option is a two-phase selection process: review of team qualifications leads to a “short list” of proposers who are asked to submit design concepts, in return for which the owner pays a proposal stipend.

Contractors and designers

Preparing a design-build proposal requires close association between the contractor and designer, as well as open communication with the owner. Requirements and constraints stated in the RFP may be relaxed if the owner gets an added benefit in return. Even the design-build contract may be subject to negotiation.

The design-build team should study the proposed contract to see how anticipated project risks are allocated. For example, the owner usually takes the risk of unexpected subsurface conditions and scope changes, but the risk allocation depends on the specific contract terms. Sometimes certain risks are managed using contingency funds, in which case the terms under which those funds will be managed can be critical.

The contractor and designer will enter into an initial agreement for the proposal phase and then a second agreement if the team is selected. To avoid disputes later on, the initial agreement should outline the terms of the second agreement. In both agreements, collaboration is promoted if the parties share risks to the extent practical, including through insurance. It is reasonable to take into account the fact that the contractor stands to earn considerably more from the project than the designer does.

The designer may be accustomed to finishing the design before the contractor appears, but it must be open to contractor input and design ideas that make the project more constructible. The contractor may be accustomed to blaming construction problems on defects in the plans, but it must “buy in” to the design and look for ways to anticipate and resolve design errors or omissions at minimum cost. It is helpful to anticipate potential claims against the owner and to plan how to identify and pursue them. Co-location of design and construction staff may help.

It is impossible in a short article to do more than identify some of the considerations that go into a successful design-build project. More information is available from the Design-Build Institute of America (www.dbia.org).

Karl Oles is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7535 or at karl.oles@stoel.com.

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Construction liens protect people who improve real property from the risk of nonpayment. The lien is a kind of security interest in the property improved. If other remedies fail, a person with lien rights may require that the property be sold to pay his or her claim. Architects and engineers have lien rights under Washington and Oregon law.

Washington

The Washington lien statute provides that persons furnishing “professional services” have lien rights. RCW 60.04.021. Professional services include the work of architects and engineers. RCW 60.04.011(13).

Professional services need not be performed at the project site for a lien to arise, and there is no requirement that the project actually be built. So an architect or engineer may have lien rights even if the project doesn’t get off the drawing board.

The value of an architect’s or engineer’s lien depends in part on the relative priority of other interests in the same property. When comparing construction liens, architects and engineers share low priority with prime contractors; liens for labor, materials and equipment and for work by subcontractors have priority. RCW 60.04.181(1).

When measuring construction liens against non-lien interests, however, priority is determined by when the interest “attached” to the property. Construction liens generally attach when the claimant’s work begins, while other kinds of property interests (e.g., deeds of trust) usually attach upon recording with the county auditor. Thus, if Sandra, an architect, begins work on April 5 and a deed of trust is recorded on April 10, her lien has priority over the deed of trust.

Because architectural or engineering liens can arise before any work is visible at the property, other persons acquiring interests in the same property are at risk. Washington law provides that professionals can record notices of their services. If no notice is recorded and an inspection of the project site reveals no traces of the professional’s work, the professional’s lien may be subordinated to later mortgagees and purchasers who lack notice of the professional’s work. RCW 60.04.031(5). It is prudent for architects and engineers in Washington to file the statutory notice in order to preserve their lien rights.

Oregon

The Oregon lien statute also provides that architects and engineers have lien rights. ORS 87.010(5). There is no requirement that professional services be rendered at the project site. It is an open question whether the planned project must actually be built (see Steven J. Kuhn’s article “” in the Willamette Law Review).

Oregon law regarding the priority of a lien for professional services is somewhat complex, in part because the lien’s effect on the improvement and the underlying land are analyzed separately. In general, a professional’s lien on an improvement (at least with respect to original construction) has priority over all mortgages and other encumbrances on the land, even including those that predated the commencement of the professional services. ORS 87.025(2). The professional may also have lien rights against the underlying land, but those rights may be subordinate to other interests.

The key notion here is that construction liens are deemed to attach to the land at the “commencement of the improvement,” which is defined as the time that significant work has begun at the site. ORS 87.025(7), 87.005(1). This provision has not been interpreted by the Oregon courts, but it would appear to limit the utility of a construction lien for an architect or engineer by giving priority to other interests that attach before construction commences (but after design services have commenced).

In Oregon, the relative priority of construction liens is simple: all such liens have the same priority. Thus, if the property is sold and the proceeds are insufficient to pay all liens in full, all claimants are paid pro rata. ORS 87.060(6).

In both Washington and Oregon, once construction lien rights have arisen, the law requires further acts (such as sending notices to the project owner or recording formal notices within specific time frames) to keep the lien in existence. The subject is somewhat complex and the advice of a lawyer is recommended. The foregoing comments are offered because some architects and engineers do not know that they have lien rights at all.

Karl Oles is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 206-386-7535 or at kfoles@stoel.com.

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