The Oregon Public Contracting Code is a detailed, often-amended statute with many moving parts, and these complexities pose a challenge for public agencies and private developers working with agencies on public projects. Here are four facets of public contracting to note:

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Not all bonds are created equal

With limited exceptions, contractors are required to obtain performance and payment bonds for public improvement contracts. But because contractors often don’t have significant liquid assets, and their insurance policies often contain terms that make claims recovery difficult, bonds can be the best method for recovery of losses due to contractor default.

The forms of bonds, however, are not specified in the Public Contracting Code, and off-the-shelf bond forms are often not protective of the public agencies or other bond beneficiaries. For example, a performance bond may severely restrict the time to file bond claims, or the bond may contain onerous notice provisions that make it unnecessarily difficult to file claims.

Public agencies should assess the terms of their bond forms to ensure the forms will serve their intended purposes, and agencies should include their preferred bond forms with bid or RFP advertisements. On the flip side, contractors who want to avoid their sureties paying on a bond should look for broad insurance with adequate limits.

Alternative contracting methods

The traditional low-bid method of hiring a contractor, after the project design is complete, is becoming less and less common. More often, owners want their contractors involved on the project team during the design process, before construction pricing can be estimated with reasonable accuracy.

The Public Contracting Code allows public agencies to hire using alternative methods, most notably the “CM-GC” method, in which the contractor is hired before the project is designed so the owner can benefit from the contractor’s advice about value engineering, product selection, sequencing, constructability, schedule-building and the like. Before putting projects out to bid, public agencies should consider whether alternative contracting is a good fit.

Bid exemptions

With few exceptions, public improvement contracts must be awarded based on competitive bids. Under the Public Contracting Code, however, a public agency can exempt a public improvement contract and select a contractor through a competitive proposal process. To qualify for an exemption, the public agency must find that: 1, the exemption is unlikely to encourage favoritism or substantially diminish competition, and 2, awarding the contract under the exemption will likely result in substantial cost savings and other benefits to the agency.

The Public Contracting Code includes a list of potential factors to satisfy the “benefits” requirement, including the public benefits from granting the exemption, the specialized expertise necessary for the public improvement, and others.

Feasibility and cost analysis

For certain procurements with an estimated contract price of more than $250,000, the Public Contracting Code requires public agencies, with some exceptions, to either: 1, demonstrate that performing the services with their own personnel is not feasible, or 2, demonstrate, through cost analysis, that they would incur less cost hiring a private company to perform the services than using their own personnel and resources. The feasibility/cost analysis requirement doesn’t apply to many services related to public projects, but it does apply to contracts for construction other than public improvements, such as ordinary repair or maintenance of public improvements.

A public agency should take care when performing the cost analysis. In a recent decision, the Oregon Court of Appeals determined that a school district failed to conduct a proper cost analysis of the use of a private bus company in lieu of public personnel. The court found that, in preparing her cost estimate, the district manager didn’t obtain information to estimate salary or wage and benefit costs for private busing contractors; instead, she assumed that a private contractor would have the same wage, salary and benefit costs as the district. If required, a public agency should take care to perform a well-supported and well-documented assessment of public and private options.

Poring over the Public Contracting Code and a public agency’s procurement rules can be a headache, but knowledge of procurement requirements can help the public agency avoid land mines on the road to a project’s success and make the procurement process run more efficiently and effectively for the benefit of the public.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or stephen.kelly@stoel.com.

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The owner’s rights to use project design documents can be overlooked during contract drafting and negotiation. Standard form design contracts, however, often contain design document terms that weigh heavily in the architect’s favor, and this can leave the owner unable to freely use a design if there’s a dispute between the owner and architect. Here are ­five questions an owner should ask to ensure good access to design documents.

Do you have an unencumbered right to use the design?

Project owners should make sure that their contracts with architects give them the right to use design documents as intended, especially if the owner’s relationship with the architect goes south. Form contracts will often condition the owner’s right to use the design on the owner’s payment to the architect or compliance with other contract terms. While this sounds reasonable in theory, it can be tricky in practice if the owner and architect disagree about the architect’s compensation or other contract terms. One approach is for an owner to obtain an irrevocable license to use – or to hire others to use – the design documents to construct, repair, remodel and operate the project. The contract should make clear that this license survives any termination of the contract or dispute between the owner and architect, so that the completion of the project isn’t threatened by this termination or dispute.

Have you required as-built drawings?

An architect’s proposed scope of work may not include preparing “as built” drawings – in other words, drawings that show changes in the project made during construction. With the passage of time, memories fade, key personnel retire and a working knowledge of the true conditions of a building is lost. Without as-built drawings, it may be very difficult – and expensive – to maintain, remodel or repair a building (for example, imagine the expense of having to poke holes in your ceiling in a search for piping or cabling that needs repair). To minimize these risks, an owner should consider requiring its architect to synthesize change orders and other design-related documents prepared during construction into as-built drawings.

Is the unique look of your project protected?

Projects often have unique qualities that an owner does not want repeated by others. Restaurant franchises, for example, often contain unique design features based on a prototype building design. If the owner doesn’t want its project design repeated, the owner should include in its design contract a requirement that the architect refrain from designing another building that looks the same as or substantially similar to the owner’s project.

Are you furnishing any design documents to the architect?Ěý

As part of the design process, the owner sometimes gives the architect design specifications or other requirements developed by the owner as part of its business branding (for example, interior design specifications) to be incorporated into the architect’s design. If they are, the owner should include in its architect contract the requirements and conditions of using the owner’s design documents, and the design contract should make clear that the use of owner-furnished design documents doesn’t limit the architect’s responsibility for the project design, and that the architect’s use of the owner’s documents is limited to the project and must be kept confidential by the architect and its consultants.

What about design-build documents?

Development projects often contain parts that are designed by the contractor or its subcontractors rather than the architect, such as HVAC systems, fire sprinklers, audio/visual systems and steel stairs. The rights of the owner to use design documents prepared by design-build contractors, however, may be forgotten in the sea of contract terms and project paperwork. An owner should identify what portions of the work will be performed on a design-build basis and then make sure that it has irrevocable rights to use the design-build documents.

As with all contract terms, careful drafting of design-related terms can help avoid problems in the future. Asking whether your contract gives you the right to use project design documents, even if there’s a problem between you and your architect, is a good first step.

Stephen Kelly is an attorney in the Construction and Design practice group of Stoel Rives LLP and may be reached at 503-294-9448 or stephen.kelly@stoel.com. Ěý

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Because contractors often have limited liquid assets, insurance and bonding are often the best resources available to an owner to protect against contractor default or defective work. However, not all policies and bonds are created equal, and owners should make sure these resources provide the security the owner needs. Here are five questions an owner should ask.

Is your contractor self-performing the work?

A contractor may offer to self-perform a portion of the work as a way to save costs, on the theory that the contractor won’t charge a markup for its own work. Cost savings may be important to the success of a project, but they may come with a hidden cost. Because virtually all contractor general liability policies contain a “your work” exclusion, defects in self-performed work are very likely not covered by the contractor’s policy (not that this exclusion usually doesn’t apply to work performed by its subcontractors). An owner should assess whether the cost savings from self-performed work are worth the risk of insurance not covering this work.

Will your contractor have insurance after the work is complete?

Construction defects are, of course, often discovered after the work is complete, sometimes years after. However, the contractor may not carry insurance that sufficiently covers damage that occurs after completion. This post-completion insurance is commonly called “completed operations” coverage. If an owner specifies insurance requirements for its project – for example, that the contractor and its subcontractors carry a minimum amount of coverage – it should ensure that those requirements continue after completion of the work. A conservative approach is to require that the completed operations coverage last until the expiration of the statute of repose, which is the date when the owner can no longer bring a claim against the contractor.

Does your contractor’s policy contain an exclusion that prevents coverage?

The details of a project may clash with exclusions in the contractor’s general liability policy. For example, the contractor’s policy may exclude residential or condominium projects. It’s possible that these exclusions can be removed through negotiation with the contractor’s insurer, or that there are alternative methods for insuring the project (for example, through an owner-controlled insurance program). The construction contract should make clear that exclusions that could reduce or kill coverage for the project are not allowed.

Are you relying on subcontractor default insurance?

Some contractors market their buying of subcontractor default insurance as a way to protect against subcontractor work failures and will often ask that the owner pay for the premium for this insurance as a cost of the work. In practice, subcontractor default insurance can provide an indirect benefit to an owner because it may cover the cost of subcontractor default in lieu of other insurance or bonding.

It’s important to recognize, though, that the beneficiary of a subcontractor default policy is very likely the contractor, not the owner, and the contractor likely won’t be obligated to bring a claim on a subcontractor default policy on the owner’s behalf. An owner doesn’t want to be in the position of relying on subcontractor default insurance, only to have its contractor refuse to make a claim on the policy. An owner should think of subcontractor default insurance as a resource that may provide an indirect benefit, but not a core element of the owner’s risk protection.

Should you require a performance bond?

Because of the cost of bond premiums, performance bonds are less common in private projects than in public projects, where they are often statutorily required. However, a performance bond can be an effective resource for contractor default, and, in comparison to an insurance policy, the bond should have fewer restrictions and exclusions on coverage.

If a performance bond is required, care should be taken with its terms. For an owner, the best approach is to prepare the performance bond. At the very least, the owner should carefully review the bond form proposed by the contractor’s surety, as bond forms often contain coverage limits (for example, a limited period to make bond claims) or burdensome claims procedures. The performance bond should cover the contractor’s contractual duties not only during the project but after as wellĚý – for example, a contractor’s warranty or indemnity obligations. The owner should make sure it’s using a performance bond form that provides reasonable protections against contractor default.

Before the project starts, an owner should identify the constellation of resources – contractor insurance, subcontractor insurance, bonding, etc. – that will be available if the contractor fails to perform, and make sure these resources are sufficient for the owner’s needs and program. Careful consideration of these issues at the start may reap significant benefits later.

Stephen Kelly is an attorney in the Construction and Design practice group of Stoel Rives LLP and can be reached at 503-294-99448 or at stephen.kelly@stoel.com. Ěý

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During a busy development project, it’s often difficult for an owner to take time to manage all the details related to the performance of its contractor or designer. Tackling important issues as they arise, however, can be critical to a project’s success. Here are six examples:

1. Know the contract and follow it

After contracts are signed, they’re sometimes handled as if they’re radioactive: packed away, never to be touched again. And, rather than reading the contract, owners may rely on their memory of what was agreed to, or what they consider standard industry practice. But this approach comes with significant risks, and could harm an owner’s rights under the contract or its ability to hold the contractor or designer to what was agreed to in the contract. For example, if there’s a dispute between the parties, there’s often a step-by-step process for resolving it. A working knowledge of the contract terms is best, but, at a minimum, an owner should read the contract (or have its attorney read it) when an important issue arises, to know what the contract says about the issue.

2. Review meeting minutes

You might ask yourself: Who has time to review meeting minutes? Minutes, however, may be the only written record of a project meeting, and they might not accurately reflect the meeting discussion or what, if anything, was decided (for example, whether the owner agreed that the contractor is entitled to a time extension). Take time to read meeting minutes, flag any substantive errors and omissions, and correct the record if necessary.

3. Close change orders

It’s not uncommon for written change orders to lag behind informal discussions between an owner and its contractor about how much extra time and money the contractor is entitled to because of a scope change. This is understandable, if keeping the project on schedule is more important than a final decision on cost and time impacts. However, change orders should be signed as soon as possible, because the further one gets away from the change decision the harder it may be to assess its impacts or to negotiate cost and time adjustments. It’s also important to make sure that the change order is consistent with intent. For example, the change order should accurately describe the changed work, and the contractor shouldn’t reserve claims that not intended (for example, a change order to increase the contract price that reserves the contractor’s right to assert a claim for additional time).

4. Respond to correspondence

Like all busy professionals these days, an owner faces an avalanche of emails, letters and other documents, and it’s tempting to procrastinate about responding to project documents (or not respond at all). While that approach may be necessary and appropriate in some situations, it’s important to develop a sense for when a response is required – for example, if a contractor describes a situation that may result in a claim, it’s important to have all relevant facts in the record.

5. Document claims

Even the best claim can be crippled by poor documentation. If an owner believes its contractor or architect has made an error, it should notify the contractor or architect in the way the contract requires. If specialized help is needed to assess an error, consider hiring a qualified expert. If an employee familiar with the claim is about to retire and move to Tahiti, interview the employee about the claim. If the claim can be visually examined, photograph it. Above all, collect, review and store documents relevant to the claim.

6. Ensure that the designer reviews design changes

Coordination between a contractor and designer can be a pain, and it can be tempting for an owner to try to take on a designer’s responsibilities in order to save time and money. For example, an owner may try to approve a change in the work without consulting its project architect. The risk with this approach is that, absent limited circumstances, a contractor won’t be responsible for the design, and a failure to consult with the project architect may result in the owner bearing the risk of a design issue.

There are only so many hours in the day, and the details of a project can be overwhelming. At the same time, letting important issues linger can make project success more at risk. Addressing important issues in real time is the best approach.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or spkelly@stoel.com.

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In the flurry of a development project launch, it’s common for owners to not consider whether their architect and contractor agreements fit together well. These agreements are often negotiated at very different times in the development schedule, and it may not be obvious which terms in one affect those in the other. Discrepancies between the architect and contractor agreements, however, can impact the success of a project. Here are five questions an owner should ask.

1. Are disputes heard in a single forum?

Perhaps the most common inconsistency in architect and contractor agreements is selecting different places to resolve disputes (for example, arbitration for the architect, court for the contractor). Inconsistent dispute resolution terms are a real danger to the owner, because they multiply the expense of litigation and potentially lead to conflicting results (for example, the arbitrator in an owner/architect arbitration decides a defect is the contractor’s fault, but the jury in an owner/contractor litigation decides it’s the architect’s fault, and so the owner gets no relief).

To avoid this situation, the architect and contractor agreements should have identical dispute resolution terms, and the architect and contractor should be required to include these same dispute resolution terms in their subcontracts. And to further hedge against the risks of multiple forums, the owner should have the option in both agreements to resolve disputes in arbitration or court.

2. Is the contractor performing any work on a design-build basis?

Important elements of the project (for example, the HVAC work) often are performed by the contractor on a design-build basis – in other words, the contractor furnishes the design and construction for that portion of the work.

The architect contract should make clear what role, if any, the architect has regarding design-build work (for example, the architect might furnish performance specifications). On the flip side, the construction contract should make clear that the contractor – not the architect – is responsible for the design of the design-build elements. Without a clear assignment of roles, an owner runs the risk of creating a hole in design responsibilities.

3. Are the architect’s services consistent with the general conditions?

It’s common for construction contracts to contain a set of “general conditions” that describe the architect’s construction-phase role (the AIA A201 general conditions are a common example). Owners should take care to ensure that the duties assigned to the architect in its agreement are consistent with those in the general conditions (for example, the architect’s role in reviewing the contractor’s work or the contractor’s shop drawings). Also, it is important that an owner get the architect’s buy-off on how its duties are described in the general conditions; otherwise, these duties will not be binding on it.

4. Do I have adequate insurance coverage for design errors?

Adequate insurance coverage can be critical to protect the owner from defects or other problems with its project. And, to make sure there’s adequate insurance for a project, an owner should consider the insurance coverage of its architect, its contractor and their subcontractors as pieces of one puzzle. To that end, if the project includes design-build work, the owner should ensure that the architect, the contractor and their “design” subcontractors carry professional liability insurance.

5. Has the architect reviewed the contractor’s clarifications and assumptions?

When negotiating a contract price, contractors may submit a list of clarifications and assumptions that the contract price is based on, and contractors may also want this list included in their contract. Because these clarifications and assumptions often amend the architect’s design documents (for example, swapping one flooring product for another), the owner should ensure that its architect buys off on all design-related clarifications and assumptions, and recommends to the owner whether these changes need to be incorporated into the design. And, if the architect incorporates clarifications or assumptions into the project design, they should be removed from the construction contract to avoid confusion.

Contracts are complicated enough one at a time, and the last thing an owner wants to do is worry about two contracts at once. However, careful consideration of how key parts of architect and construction agreements fit together can avoid trouble down the road.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or spkelly@stoel.com.

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Timing, as people say, is everything, and the success of a development project often hinges on when it will be complete. Whether it’s a new business, a new school or some other project, delay can be disastrous for an owner. Here are five tips to reduce the risks of project delay.

1. Avoid terms that shift delay risk

The American Institute of Architects contract forms and others contain waivers of consequential damages or other terms that shift the risk of project delay onto the owner. Many people will argue that “consequential damages” include the owner’s damages for loss of use of the project, although some will argue that waivers of consequential damages are unenforceable in Oregon under ORSĚý30.140. Depending, then, on how the waiver is interpreted, an owner may be waiving the right to hold the contractor responsible for delay – even if the contractor is 100 percent at fault. If possible, an owner should resist risk-shifting terms.

2. Consider liquidated damages

To allocate risk between the owner and contractor, one alternative is for the parties to negotiate liquidated damages for delay. Liquidated damages allow both parties to know the risk of delay before construction begins, which addresses one of the common reasons given by contractors for a consequential damages waiver.

Negotiating liquidated damages, however, can be tricky. The amount should be a reasonable estimate of the actual damages that the owner would incur from the delay. Remember, though, that liquidated damages are by definition “liquidated” (i.e., settled). So, absent contract language to the contrary, the owner cannot seek delay damages that exceed the negotiated liquidated damages.

But, if done properly, liquidated damages present a way for both the owner and the contractor to feel comfortable with a project’s delay risk.

3. Be clear about what “completion” means

Construction contracts usually define “substantial completion” and “final completion.” Substantial completion, for example, is often defined as when the project can be used for its intended purposes. For some projects, though, a basic completion definition won’t cut it.

When drafting the contract, the owner should consider what hoops need to be jumped through so that the project can be used. Are there special lender or tax credit requirements? Does specialized equipment need to be commissioned and tested? Does the contract list all end-of-project deliverables (for example, waivers of claims from subcontractors, or as-built drawings)?

If it’s important for project completion, the contract should say so. If there’s no question about what “completion” means, it’s less likely there will be a dispute about what “delay” means.

4. Consider a performance bond

There’s no getting around it: Performance bonds are neither cheap nor a foolproof way to protect an owner from contractor default. However, if a contractor fails to perform, a performance bond can be helpful in getting a project back on track or compensating an owner for delay loss.

Remember, though, that bond terms vary wildly, and an owner’s rights under bonds will vary too. Some bond forms, for example, give only a short time to make a claim. Other bonds have difficult preconditions to making a claim. An owner who wants the contractor to acquire a bond should prepare an owner-friendly form and include it in the construction contract.

5. Keep a clean project record

Delay claims can be exceedingly complicated, and they often require a deep analysis of the project record to determine the causes of the delay. Maintaining a clean project record, therefore, can be critical to an owner successfully defending or asserting a delay claim. For example, an owner should approve changes in the work only through a carefully maintained system of change orders and change directives.

In another example, an owner should not let a contractor’s written statements about delay sit unanswered: If an owner doesn’t agree with the contractor’s perspective on why work wasn’t done on time, the owner should say so, in writing.

In another example, the owner should make sure the contractor submits, with each invoice, claims waivers for itself and its subcontractors, so the owner doesn’t have to worry about lingering delay claims. These and other record-keeping efforts are a headache, but if there’s a delay problem they could mean the difference between success and failure.

There’s no way to avoid all the risks of delay, but with careful contracting and project management, these risks can be reduced.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or at spkelly@stoel.com.

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Lien claims can be disruptive. Schedule is often critical to a project’s success, and liens can prevent stores from being leased, condominiums from being sold and project sales from closing. Also, an owner or developer often is liable to a lender, landlord or investor for liens filed on the project property.

Here are five tips for owners or developers facing lien claims.

1. Is the lien claimant licensed?

When receiving a lien claim from a contractor, an owner or developer should first check the licensing status of the lien claimant on the Oregon Construction Contractors Board website. If the claimant is required to have a CCB license but doesn’t, the claimant is not entitled to a lien.

2. What are the lien deadlines?

Oregon lien statutes have strict filing deadlines. A lien claim for labor, materials or rental equipment must be filed (or “perfected”) within 75 days after the claimant stops providing labor, renting equipment or furnishing materials, or 75 days after completion of construction – whichever is earlier. All other lien claims must be filed within 75 days after completion of construction.

If a filing deadline is missed, the lien claimant has likely lost its right to a lien. Which deadline applies, and whether a deadline was missed, however, can be tricky. For example, punch list work after substantial completion may not extend the deadline. An owner or developer should carefully review the project history to pin down when the lien claimant’s work was completed, and then compare that date with the lien statute’s requirements.

3. Was the claim filed correctly?

The filing of lien claims is a technically challenging process, and mistakes are common. Although not all mistakes invalidate a lien claim, some do. So, owners and developers should carefully compare the lien statute’s requirements against the lien claims filed on their projects.

There are many steps in the lien claim process that could trip up the claimant. Some lien claimants – material suppliers and most residential contractors, for example – must furnish certain notices to the owner, or lose their lien rights.

Also, if a lien claimant doesn’t notify owners and mortgagees of the claim within a certain time, the claimant will lose its right to recover attorneys’ fees if there’s a lien foreclosure lawsuit. Or, if a lien claimant doesn’t segregate its claim for materials from other charges, it may lose its priority to foreclose the property for those charges.

A careful review of the claim could uncover these and other deficiencies.

4. How’s the math?

A lien claimant is only entitled to lien the amount it has earned but hasn’t been paid. Along with the rest of the claim, an owner or developer should carefully review the cost information supplied by the claimant in support of the lien claim. Note that an owner can demand a list of materials or equipment; a description of labor or services supplied; and the contractual basis for supplying the materials, equipment, services or labor.

To best evaluate the lien claim – and any potential defenses to the claim – the owner or developer should master the facts surrounding the claim.

5. Have you contacted the contractor?

If the lien is filed by a subcontractor, the owner or developer should immediately demand that the contractor take whichever steps necessary to have the lien removed. Unless the circumstances are unusual – for example, if the contractor is out of business – an owner should not bear the burden of dealing with a lien claim filed by a subcontractor.

To prepare for these situations, an owner or developer should make sure that its prime contract requires the contractor to remove a lien filed by one of its subcontractors, and to indemnify the owner or developer for the lien. If the contractor fails to remove the lien, the owner or developer could purchase a bond to remove the lien from the project title.

An owner or developer can minimize lien risks by maintaining accurate records, requiring lien waivers, hiring a good contractor and taking other preventive measures. Liens, however, are a reality. And if one is filed, a careful review of the surrounding circumstances can be critical in successful defense.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or at spkelly@stoel.com.

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By definition, general contractors are caught in the middle between their owner-clients and their subcontractors: owners hold them responsible for their subcontractors’ work, and they must make sure that their subcontractors stand behind their work. A well-drafted subcontract helps a general contractor navigate these often tricky relationships.

Here are five questions for general contractors to ask about their subcontracts.

Is there any daylight between the general contractor and its subcontractor?

A general contractor wants to make sure that subcontractors’ obligations are, at a minimum, equal to its obligations to the owner. To accomplish this, subcontracts typically include a “flow down” clause, which obligates the subcontractor to assume the same responsibilities to the general contractor that it assumes to the owner.

Beyond that, a contractor should make sure that important subcontract terms are consistent with the prime contract. For example, indemnity to the owner should not be broader than a subcontractor’s indemnity to the general contractor. Otherwise, the general contractor will be left holding the ball if it can’t pass an indemnity obligation to the subcontractor.

Is the prime contract properly incorporated into the subcontract?

To ensure that obligations under the prime contract flow down to the subcontractor, the subcontract should clearly state which terms of the prime contract are incorporated into the subcontract.

A blanket incorporation of the prime contract into the subcontract is usually a good idea, but it may not be enough. If there are important terms in the prime contract that need to be incorporated, make sure they are.

And the subcontract should state which terms control if there’s a conflict between the prime contract and the subcontract. At the same time, avoid incorporating terms that should not apply. For example, incorporating a prime contract’s liquidated damages provision may limit a delay claim against the subcontractor.

No damages for delay?

To limit risk if there’s a work delay, consider including a “no damages for delay” clause in the subcontract. Under such a clause, a subcontractor may be entitled to an extension of time to perform its work if the delay is excusable, but the subcontractor can’t seek damages resulting from the delay. If clearly stated, a “no damages for delay” clause can be enforceable in an Oregon subcontract.

Pay-if-paid, or pay-when-paid?

A general contractor may want to protect its cash flow by committing to pay the subcontractor only after the owner pays, and subcontracts often contain clauses that try to condition the subcontractor’s right to payment on the owner’s payment to the general contractor.

These provisions, however, can have harsh effects on a subcontractor, because if the owner becomes insolvent or withholds payment for reasons unrelated to the quality of the subcontractor’s work, the subcontractor is not paid. Because of this, courts can look with disfavor on these clauses, and they are often interpreted to require payment to a subcontractor within a reasonable time – regardless whether the owner fails to pay. These are commonly referred to as “pay-when-paid” clauses.

Some courts, though, have found that these clauses condition a contractor’s obligation to pay a subcontractor on the contractor’s payment by the owner. These are commonly referred to as “pay-if-paid” clauses. To maximize the chance that a pay-if-paid clause will be enforceable, the intent should be as plain and unambiguous as possible.

How are disputes resolved?

If an owner-client brings a claim against a general contractor for something a subcontractor did, the general wants to be able to smoothly pass that claim on to the sub. A key part of this smooth pass-through is to make sure that the subcontractor agrees to be bound by whatever dispute resolution process governs the general contractor’s contract with the owner.

Construction disputes often are resolved in arbitration, but unless a subcontractor agrees to hear disputes in arbitration, a general contractor is forced to bring a separate case against the subcontractor in court. This makes litigation even more expensive, and could result in inconsistent results that are harmful.

For example, the arbitrator may rule in favor of the owner, but the judge or jury in a lawsuit between may rule in favor of the subcontractor. Make sure that the subcontractor is bound to the same dispute resolution process as the general contractor.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or spkelly@stoel.com.

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Not all construction projects end happily, and sometimes it’s best for the owner and contractor to part company. But when a contractor’s contract is terminated, a project can suffer delays and cost overruns. Careful planning, however, can soften the effects of termination. Before terminating a contractor’s contract, consider these six questions:

Terminate for convenience, or for cause?

Many construction contracts allow the owner to terminate the contract for its convenience – in other words, without needing to find the contractor in default. Terminating for convenience can be an attractive option, but there are potential downsides.

For example, some standard contract forms require an owner that terminates for convenience to pay profit on unperformed work, so the owner could wind up paying both the terminated contractor and its replacement to complete the project. The owner, then, should carefully compare the pros and cons of terminating for convenience and for cause, and determine which option best fits the circumstances.

Does the bond have any pre-termination requirements?

It’s common for owners to purchase performance bonds in which a surety stands behind the contractor’s work. If there is a performance bond for the project, the owner should carefully review the bond’s requirements. Performance bonds sometimes contain steps that an owner must take before terminating the contractor’s contract.

Is the contract being closed out properly?

Construction contracts often contain detailed terms for wrapping up the contract, and the owner should review these terms and ensure compliance. For example, the contract may require the terminated contractor to assign its subcontracts to the owner, or to protect and preserve its work.

At the same time, the contract may require the owner to take certain actions upon termination; for example, when terminating for convenience, the owner may have to pay the contractor within a set number of days. Proper close-out should help avoid issues from lingering after termination.

Have claims been preserved?

The owner should assess its claims against the terminated contractor and take actions to preserve them.ĚýFor example, to help avoid a fight over what work the terminated contractor is responsible for, the owner should document the status of the work – including all known defects – before the replacement contractor takes over.

Also, the replacement contractor should document the costs for correcting defective work and performing work outside of the terminated contractor’s scope of work – for example, by using separate cost codes.

These steps won’t stop an argument over responsibility for work or how much the terminated contractor is owed, but they should make it easier for the owner to assert its claims and defend against the terminated contractor’s.

What does the project designer think?

An owner who determines that the contractor’s work has defects should consider asking the project designer for an assessment. Keep in mind that the project designer likely would play a role in any future litigation between the owner and contractor.

Prepared for litigation?

If it’s possible that termination will lead to litigation, there are other questions to consider. How are disputes resolved under the contract? Does a selected lawyer have the right experience for the job? Do experts need to be hired? Is there understanding of the risks involved in pursuing claims or defending against the contractor’s? If the owner and contractor do end up in litigation, the owner should not be caught flat-footed.

No matter what the situation, terminating a contract can be a difficult and risky decision. Proper preparation, though, can reduce the risks and losses of termination.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or spkelly@stoel.com.

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For owners, design-build projects can make a lot of sense. With one party responsible for the whole process, communication is simplified and less finger-pointing occurs when problems arise.

On the other hand, design-build projects also come with risks. There are no natural checks and balances that are present with a separate designer and contractor. Also, the one contractor could have limited resources and leave the owner inadequately protected. Following are four questions for owners to ask themselves when they choose the design-build option.

1. Have I spelled out what I want?

A good design-build contract clearly says what is to be designed and built. To achieve this, the contract should list project requirements. Think of these requirements as a project wish list. For example, will the building have any special temperature, air flow or other environmental conditions? Should the building qualify for a green construction standard? Should there be criteria for special equipment? If it’s important, be sure it’s in the contract.

2. Who is my design-builder?

Know the resources that stand behind the design-builder. For example, it’s common for parties to form a joint venture for a design-build project. But what is known about the joint venture? The joint venture, for example, may not have adequate insurance or other assets to back up its work. Or the parties may have limited their liability in the joint venture agreement.

Take steps to ensure there is a full set of remedies – for example, reserve the right to have subcontracts assigned to you if the design-build contract is terminated. And if it is a joint venture, ask to see the joint venture agreement beforehand. If resources provide insufficient protection, look for additional assets – such as guarantees from joint-venturing parties. The design-build approach should enhance the success of the project, not limit an owner’s rights.

3. Am I covered by insurance?

Because designers and contractors often don’t have significant liquid assets available to pay claims, insurance is critical to protect an owner’s rights. The design-builder’s own insurance, however, may be inadequate. For example, the design-builder’s professional liability insurance may not cover the work of the project designers. Or a joint venture may carry little insurance of its own.

A useful exercise is to chart the insurance of the design-builder and each of its subcontractors, so that the whole picture can be seen and coverage gaps can be spotted. Then come up with a game plan for insurance coverage and make sure the contract spells out insurance obligations for both the design-builder and its subcontractors.

4. When do I set the contract price?

This can be tricky. An owner’s leverage is strongest before the contract is signed. But it’s difficult to price construction before the design is complete, because the design-builder won’t be able to secure firm pricing from subcontractors. To hedge against uncertainties, the design-builder will desire to include contingencies for cost escalation, bidding uncertainties, design adjustments and the like. A contract price negotiated before design is likely to include plenty of contingency fat.

On the flip side, setting a contract price after design poses its own challenges. If an owner negotiates the price after the design is done, the design-builder will have already worked on the project for months. At that point, it will be difficult – and expensive – to change design-builders. Because of this, all bargaining leverage will be lost.

To reduce this risk, establish a project budget from the start – and stick to it – and require the design-builder to submit cost estimates during each design phase. These steps won’t prevent a tough price negotiation, but they will reduce the chance of a big surprise when the design-builder submits its proposed price.

Design-build can be a useful method of project delivery. Owners’ chances of success will improve when they ask the right questions before contracts are signed.

Stephen Kelly is a member of the construction and design practice group at Stoel Rives LLP.Ěý Contact him at 503-294-9448 or spkelly@stoel.com.

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