Managing Risk in Construction Contracts

Brendan D. BowlesGlaholt LLP

Standard Contracts: Pros

• Save time and money up front – no “re-inventing the wheel”

• Save time and money in the field – players are familiar with the contract and how it works

• Result of accumulated experience from many different stakeholders

• Avoid repeating mistakes of the past• Avoid mismatched expectations

Standard Contracts: Cons

• Banfai – “Tyranny of the Precedent” – slavish, unthinking use of precedent undermines the deal

• Standard form rarely is an exact match of the actual business deal and project requirements

• Standard forms should be revised to ensure: (a) Responsibilities of each party clearly identified

(b) Risk is properly allocated

Fundamental Risks: Design – Bid – Build (Traditional Project Delivery)

• Consultant is liable for design• Contractor responsible for construction• Contractor has no input during design phase,

can lead to conflict and increased costs• No single entity for owner to turn to if issue is

not clearly one of design or construction

Fundamental Risks – Construction Management

• Owner has direct liability to trades and suppliers, multiple entities responsible to owner for design and construction

• More contracts might equal more confusion• CM is typically owner’s agent – scope of authority

needs to be clearly defined and understood so no surprises

Fundamental Risks – Design-Build

• Single entity responsible for both design and construction

• Difficult to precisely define the scope of the design-builder’s obligations until design complete

• Fixed price risky because price cannot be precisely determined until design complete. As a result design-builder builds in price contingencies.

Other Key Risks

Construction Management

• Owner might be the “Constructor” under Occupational Health and Safety Act

• Substantial performance – when is it achieved in a project with so many “prime” contracts?

Design-Build

• Who acts as payment certifier when designer and builder are one and the same?

The Emerging Risk – Green Construction

“Green construction is planning and managing a construction project in accordance with the contract documents in order to minimize the impact of the construction process on the environment.”

Glavinich, Contractor’s Guide to Green Building Construction (Hoboken: Wiley & Sons, Inc., 2008)

Green Building:

“A building that provides the specified building performance requirements while minimizing disturbance to and improving the functioning of local, regional, and global ecosystems both during and after its construction and specified service life.”

American Society of Testing and Materials (ASTM) Standard E2114-06a

History of Green Building Movement

• 1970: U.S. Environmental Protection Agency established• 1987: Brundtland Report• 1989: American Institute of Architects (AIA) establishes its committee on the

Environment• 1992: UN Conference on Sustainable Development

UK Green Building Rating System• 1993: AIA and International Union of Architects Joint Declaration of

Interdependence for a Sustainable FutureUS Green Building Council established

• 1994: AIA Environmental Resources Guide

History of Green Building Movement

• 1998: US Green Building Council issues LEED Version 1.0• 2000: LEED 2.0• 2002: LEED 2.1• 2002: Canada Green Building Council established (modelled on

USGBC)

Risks in the Green Building Project

General principles apply equally to green building projects:

• Risk retention• Risk reduction• Risk transfer• Risk avoidance

Risks in the Green Building Project

Increased liabilities:

Use of non-standard materials and systems Increased risk of failure of such materials and systems Failure of one integrated specialty can snowball into failure of multiple related

specialties Contractual responsibility for achieving LEED certification

Risks in the Green Building Project

Reduced risks:

Air quality and mould litigation are unlikely, since green buildings tend to have exceptional air quality

Green projects are less vulnerable to energy price and water costs increases Green projects tend to be more self-reliant (more natural light, internal water and

energy generation) and therefore less vulnerable to power disruptions

Risks in the Green Building Project

Reduced risks:

Every single step in a green building project must be meticulously documented, for example, to meet LEED requirements

Potential for error is reduced, as is the potential for disputes that arise because of insufficient documentation

Liability issues are more readily determined

LEED: Leadership in Energy and Environmental Design

• LEED is:

• A method of measuring • A voluntary rating system used during the building design process to set

environmental and human health protection goals• A third-party certification process confirms the project’s achievement of the design

goals by reviewing documentation collected during the design and construction process

• A certain number of points must be achieved to meet certification standards

LEED: How does it work?

• Owner decides that the project will be a green project• Owner registers its intent to have the project certified with the CaGBC• Registration gives the design team access to technical guidance by independent LEED

experts• LEED scoring system consists of 7 prerequisites and 70 elective credits• Prerequisites have no points associated with them, but must be achieved to earn point in

the associated category

LEED: How does it work?

Different Rating Systems:

• new construction• MURB (multi-unit residential building)• campus and multiple buildings• commercial interiors• core and shell• existing buildings• neighbourhood developments

Clauses for Owners to Review with Special Care

• “Constructor” responsibility for health and safety in Construction Management projects

• Dispute Resolution• Limitation of Liability• Financial Disclosure

Clauses for General Contractors to Review with Special Care

• LEED documentation requirements• Actually a Construction Manager at risk?• Changes in the Work – documentation of changes, impact on schedule and cost• Exclusion Clauses in Bid Documents – Tercon case from B.C. heading to Supreme Court

of Canada

Clauses for Subcontractors to Review with Special Care

• “Pay if paid” or “pay when paid” clauses• Incorporation of the terms and conditions of the Prime Contract into the Subcontract• Priority of Contract Documents• CM as Agent? Who is the contract with? Might affect lien rights and availability of a

payment bond