VI. Changes and Delays in Construction Projects

Presented By: Martin J. Kenworthy Kenworthy Law, P.C. NBI Seminar: Construction Law from Start to Finish

Des Moines, Iowa June 6, 2018

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Martin J. Kenworthy is president of Kenworthy Law, P.C. Marty has been practicing law for 28 years and is licensed in the state and federal courts of Iowa, Ohio, Kentucky, and Florida and the United States Supreme Court. Marty holds a B.S. degree from Bradley University in Construction Engineering and worked in the industry for 8 years prior to beginning the practice of law in Cincinnati, Ohio. Marty’s practice includes business, commercial real estate and construction law. Specifically for construction matters, Marty represents public and private owners, design professionals, general contractors, sub-contractors and suppliers. Marty is also an arbitrator with the American Arbitration Association, primarily for construction matters.

www.kenworthylawpc.com

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The topics to be covered are:

A. Handling Change Orders

B. Documenting Changes and Extra Work

C. Delay: Excusable, Concurrent or Inexcusable

D. Deficient Plans or Specifications: Design vs. Performance

E. Damages

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A. HANDLING CHANGE ORDERS

What is a change order?

Contract Scope of Work:

The construction contract should include a “scope of work” provision. The

defined “scope of work” serves as the basis for the contractor to assert it will be required

to perform work beyond, or different from, that specified in its contract.

Requirement of a Writing

Almost all construction contracts include a requirement stating that material

changes, alterations or deviations must be ordered in writing to be valid and binding upon

the parties. Failure of a contractor to follow such process serves as a frequent basis of a

defense by an owner.

Change Orders in General

A change order is the written agreement which provides that the owner,

architect/engineer, and contractor agree on a change in the work and the degree to which

the contract time and price will be adjusted. Purpose of the written instrument:

• Parties on the project are on notice of the change

• Establishes the cost and/or time change

• Is adopted in accordance with the contract

Authorization of a Change Order:

Important to know what individuals/governing authority must agree to change

orders – important for all projects, but when dealing with public authorities must be sure

there is proper approval.

Exceptions to the Written Change Order Requirement:

• Quantum Meruit

An equitable remedy that for a contractor to claim the cost of labor,

services, and materials provided there is no specific contract covering the work.

To pursue such a claim, the threshold question is whether the alleged extra

work was required of the contractor by the original agreement.

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Under Iowa law, “[a]n express contract and an implied contract cannot co-

exist with respect to the same subject matter, and the law will not imply a contract

where there is an express contract.” Scott v. Grinnell Mut. Reinsurance Co., 653

N.W.2d 556, 561 n.2 (Iowa 2002) (quoting Giese Constr. Co. v. Randa, 524

N.W.2d 427, 431 (Iowa Ct. App. 1994)). “As a general rule in Iowa one who

pleads an express contract cannot ordinarily recover upon an implied contract or

quantum meruit.”

• Waiver

Iowa Civil Jury Instructions provide:

2400.11 Waiver of Performance. The right to insist on performance can

be given up. This is known as a “waiver.” A waiver may be shown by actions, or

you may conclude from (name)’s conduct and the surrounding circumstances that

a waiver was intended. The essential elements of a waiver are the existence of a

right, knowledge of that right, and an intention to give it up.

Frequently, the claim is made that the owner dispenses with the written

change order requirement with full knowledge of the material facts and does so

resulting in the argument that it is unjust to rely upon the strict provisions of the

contract to deny payment to the contractor.

“Generally, a builder may recover for extra work performed on a

construction project when ordered and agreed to by the parties and not covered by

the building contract.” Serv. Unlimited, Inc. v. Elder, 542 N.W.2d 855, 857 (Iowa

Ct. App. 1995). Although a contract may require written change orders, this

requirement may be waived by the parties. Cent. Iowa Grading, Inc. v. UDE

Corp., 392 N.W.2d 857, 860 (Iowa Ct. App. 1986).

• Oral Change Order

In some jurisdictions it is very difficult to overcome a contract’s written

change order requirement. A “clear and convincing” standard may apply in some

states. Other states may consider the circumstances and follow a preponderance

of the evidence standard. Maryland, Nebraska, and Massachusetts may require

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less than a clear and convincing standard to prove a change order. A Nebraska

court has held that the practice of ignoring written change order requirements will

serve to modify the contract that would otherwise bar recovery by a contractor

who does not obtain a written change order.

Courts will often consider the course of conduct between the parties

leading up to the oral change orders. If the owner and the contractor routinely

disregarded the contract’s change order provision in the past, or the owner

previously requested and paid for extra work without written change orders, then

courts tend to hold that the contract’s change order provision was nullified.

“Proof of a claimed oral contract must be ‘by evidence which is clear,

satisfactory and conclusive, and not by loose and random conversations.’ …

‘A mere preponderance of the evidence is not sufficient’ to prove an oral

contract.” Wagner Enterprises v. John Deere Shared Services, 397 F.Supp.2d

1097, 1105 (N.D. Iowa, 2005) (citations omitted) (Emphasis added).

“To prove the existence of an oral contract, the terms must be sufficiently

definite for a court to determine with certainty the duties of each party, the

conditions relative to performance, and a reasonably certain basis for a remedy.”

Wagner at 1105.

In Ziskovsky v. Ziskovsky, No. 3-1062 p. 9 (Iowa App. 2014) the court

provided: “The oral modification lacks ‘objective evidence’ from which we can

ascertain the definite terms of the modification. The oral agreement appears to be

largely based on ‘loose conversations’ between Vernon and Dwane. The district

court correctly reasoned, ‘[I]t is clear that no meeting of the minds occurred on

the terms and conditions of the agreement between the parties because none of the

three living parties to the contract could articulate exactly what the terms agreed

to by the parties were.’”

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B. DOCUMENTING CHANGES AND EXTRA WORK

Claim Notice

The construction law treatise by Philip Bruner and Patrick O’Connor summarizes

the value of notice provisions as follows:

Timely notice of claims is a matter of fundamental fairness. Fairness

inherent in timely notice permits the recipient of the notice to: (1) assess the

implications and potential liability that may be created; (2) investigate whether

the claimed item truly is “extra” to the original contractual undertaking; (3)

document costs incurred in performance of the extra work; and (4) fairly adjust

the contract price before memories fade, documents are lost and the facts recede

into the “construction haze.” 1 Bruner & O’Connor Construction Law § 4:35

(2002).

Example Notice Provisions:

AIA A201

§ 3.7.4 Concealed or Unknown Conditions

If the Contractor encounters conditions at the site that are (1) subsurface or

otherwise concealed physical conditions that differ materially from those

indicated in the Contract Documents or (2) unknown physical conditions

of an unusual nature that differ materially from those ordinarily found to

exist and generally recognized as inherent in construction activities of the

character provided for in the Contract Documents, the Contractor shall

promptly provide notice to the Owner and the Architect before conditions

are disturbed and in no event later than 14 days after first observance of

the conditions. The Architect will promptly investigate such conditions

and, if the Architect determines that they differ materially and cause an

increase or decrease in the Contractor’s cost of, or time required for,

performance of any part of the Work, will recommend that an equitable

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adjustment be made in the Contract Sum or Contract Time, or both. If the

Architect determines that the conditions at the site are not materially

different from those indicated in the Contract Documents and that no

change in the terms of the Contract is justified, the Architect shall

promptly notify the Owner and Contractor, stating the reasons. If either

party disputes the Architect’s determination or recommendation, that party

may submit a Claim as provided in Article 15.

§ 15.1.3.1 Notice of Claims

Claims by either the Owner or Contractor, where the condition giving rise

to the Claim is first discovered prior to expiration of the period for

correction of the Work set forth in Section 12.2.2, shall be initiated by

notice to the other party and to the Initial Decision Maker with a copy sent

to the Architect, if the Architect is not serving as the Initial Decision

Maker. Claims by either party under this Section 15.1.3.1 shall be

initiated within 21 days after occurrence of the event giving rise to such

Claim or within 21 days after the claimant first recognizes the condition

giving rise to the Claim, whichever is later.

SUDAS: Section 1040 1.10 (A)(1):

In any case where the Contractor believes extra compensation is due for

work or material beyond the scope of the work under the contract and not

ordered by the Engineer as extra work as defined herein, the Contractor

shall notify the Engineer in writing of its intention to make claim for such

extra compensation before beginning the work on which the claim is

based. The Contractor shall not proceed with that work until the

Contractor and the Jurisdiction have executed a change order with respect

to extra compensation.

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Example of detailed claim notice requirement:

General Conditions for Washington State Facility Construction. Each claim must

include:

1. Factual statement of Claim: A detailed factual statement of the Claim for

additional compensation and time, if any, providing all necessary dates, locations,

and items of Work affected by the Claim;

2. Dates: The date on which facts arose which gave rise to the Claim.

3. Owner and A/E employees knowledgeable about Claim: The name of each

employee of Owner or A/E knowledgeable about the Claim;

4. Support from Contract Documents: The specific provisions of the Contract

Documents which support the Claim;

5. Identification of other supporting information: The identification of any

documents and the substance of any oral communications that support the Claim;

6. Copies of supporting documentation: Copies of any identified documents, other

than the Contract Documents, that support the Claim;

7. Details on Claim for Contract Time: If an adjustment in the Contract Time is

sought: the specific days and dates for which it is sought, the specific reasons

Contractor believes an extension in the Contract Time should be granted; and

Contractor’s analysis of its Progress Schedule to demonstrate the reason for the

extension in Contract Time;

8. Details on Claim for adjustment of Contract Sum: If an adjustment in the Contract

Sum is sought, the exact amount sought and a breakdown of that amount into the

categories set forth in, and in the detail as required by Section 7.02; and

9. Statement certifying Claim: A statement certifying, under penalty of perjury, that

the Claim is made in good faith, that the supporting cost and pricing data are true

and accurate to the best of Contractor’s knowledge and believe, that the Claim is

fully supported by the accompanying data, and that the amount requested

accurately reflects the adjustment in the Contract Sum or Contract Time for which

Contractor believes Owner is liable.

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Some best practices:

The contractor should not stop working. Contracts typically require a contractor to

proceed with performance of ordered work pending any disputes over adjustments to the

schedule and the contract price. As a general rule, a contractor’s unexcused refusal to

perform constitutes a material breach of a contract. See, e.g., 1 Bruner & O’Connor

Construction Law § 4:49.

The contractor should give notice right away. If it is not clear whether the owner

has “ordered” a particular change, it is advisable for the contractor to provide notice to

the owner that it deems a set of circumstances as calling for extra work. See 1 Bruner &

O’Connor Construction Law § 4:41. Notice allows the owner to consider whether a

change has occurred. If the owner directs the contractor to proceed with the work after

such notice, a constructive change order may be deemed to have been issued in the

absence of a formal change order. Id.

The contractor should document the change. Where contracts require written

orders before changes that may affect the contract price or schedule, contractors should

attempt to obtain a written order before proceeding with the changed work. If the

contractor does not do that, they should document communications and the directives

they are given so they can later establish the potential waiver of the contract’s

requirements for written change orders.

Cases regarding change orders:

In Ida Grove Roofing v. City of Storm Lake, 378 N.W.2d 313 (Iowa Ct. App.

1985), a contractor encountered different conditions on a roof replacement project than

anticipated and it sought additional compensation after completing the work. The

contractor asserted that it bid on faulty plans and specifications which did not properly

disclose the thickness of roof insulation to be removed. The contractor also asserted that

it was told by the owner and the architect that the conditions would improve as the work

continued. There was evidence that the owner’s representative was told by the contractor

that it would seek additional compensation when the different conditions were

encountered, but the court held that even if that was true, a change order was required

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before additional compensation would be allowed. The contractor did not stop work and

seek a change order, but told the engineer additional compensation would be sought. “In

this case the contractor did not stop work and obtain a change order after he reached the

third section of the roof and found it was not in better condition that the lower sections.

We find that without plaintiff’s compliance with the change order, the court was correct

in denying the claim for additional compensation.” Id. at 315.

In another Iowa roofing case, T & K Roofing & Sheet Metal Co. v. Rockwell

Collins, 2006 WL 1009015 (Iowa Ct. App. 2006), the court adopted the holding from Ida

Grove when it upheld the denial of the contractor’s claim for additional compensation.

T & K Roofing claimed that when bidding it relied on the specifications regarding what

type of roofing material was present. When it encountered different conditions than

expected it sought a change order for additional labor, but the owner denied the change.

“The key to ‘the sufficiency of a writing as a change order is whether there was approval

of additional compensation by the owner.’” T & K at 2 (citing Ida Grove at 315,

emphasis in original). Because the owner had not approved the change order the claim

was denied.

In Jack Eherenman d/b/a Eherenman Construction, v. John M. Warren and

Sandra L. Warren, No. 13746 (Iowa Ct. App. December 24, 2014), the court held:

The district court essentially found a waiver. According to the court,

Eherenman received verbal directions from all members of the family.

The court characterized these directions as work order changes, “which

caused Eherenman Construction, on occasions, to tear out existing work

and re-do that same work solely to comply with a new work directive

received from one or more of [them.]” The court determined Eherenman

was more credible than the Warrens on this issue. We give weight to this

credibility finding because “the trial court is in a more advantageous

position than we to put credence where it belongs.” Flynn Builders, 814

N.W.2d at 545. This is particularly true where the court’s findings are

supported by extensive record evidence.

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Eherenman testified he discussed changes with the family by phone and

e-mail. Verbal or unsigned change orders were paid “about half a dozen”

times, “at least.” Eherenman cited an unsigned order to remove the

fireplace, which was billed and paid by Sandra Warren. According to

him, billings were submitted to the Warrens “[p]robably every week or

two, maybe three weeks, . . . certain invoices would come as the draws

were needed, so as we would get things done.” With respect to change

orders, Eherenman testified “if that work would be completed, then I

would invoice out for that.” Because the Warrens waived the right to have

all changes approved by written change order, Eherenman was entitled to

compensation for work performed outside the four corners of the contract

or the signed paragraphs of the written change order.

Cases from outside Iowa have followed the same analysis as Ida Grove and

T & K. The case of Cameo Homes v. Kraus-Anderson Construction Company, 394 F.3d

1084 (8th Cir. 2005), involved claims for alleged extra work by Cameo Homes. The

contract between Cameo Homes and the owner included a change order process and a

claims process. Written notice of claims had to be provided to the architect within 21

days of the event giving rise to the claim or otherwise the contractor would be precluded

from litigating the claim. Cameo did not follow the claims process but instead filed suit.

Cameo argued that the parties had modified the process through a course of dealing and

that change order requests it had given to the construction manager satisfied the written

notice requirements under the contract. The court found that the requirement that Cameo

give written notice to the architect was a condition precedent to it bringing suit and it

therefore barred the claims. “Cameo has not shown that the parties understood that its

submission of change order requests to Kraus-Anderson was effectively equivalent to

submission of claims to the architect. … Cameo failed to give written notice to the

architect of its breach of contract claims against the City as required by the contract. … It

is therefore contractually barred from bringing them here.” Id. at 1087-1088.

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The process for submitting written claims is not a minor, insignificant detail of the

contract between the parties. This is especially important when the owner is a public

entity. As provided by one court: “The purpose for the prompt written notice

requirements found in both the changed conditions clause and the change of contract

price provision is to permit the government’s early investigation into the validity of the

claim and the contractor’s resulting costs so the government may retain control of the

total contract price and weigh competing alternatives to excessive expenditures.” Dan

Nelson Construction, Inc. v. Nodland & Dickson, 608 N.W.2d 267, 274 (N.D. 2000).

Basis for Extra Work Claim

• Implied Warranty of Complete and Accurate Contract Documents

Design specifications come with an implied warranty that if they are followed, the

contractor can produce an acceptable result. United States v. Spearin, 248 U.S.

132 (1918). The Court provided:

[I]f the contractor is bound to build according to plans and

specifications prepared by the owner, the contractor will not be

responsible for the consequences of defects in the plans and

specifications. This responsibility of the owner is not overcome by

the usual clauses requiring builders to visit the site, to check the

plans, and to inform themselves of the requirements of the work …

“[T]he insertion of the articles prescribing the character,

dimensions and location of the sewer imported a warranty that, if

the specifications were complied with, the sewer would be

adequate. … The breach of warranty … [made the Government]

liable for all damages resulting from its breach.

Id. at 137.

An owner is expected to provide the contractor with complete and accurate

contract documents. Extra work required to correct deficiencies from inadequate

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plans or specifications must be paid for by the owner as either a breach of the

implied warranty, or as a breach of a statutory duty or common law.

In Midwest Dredging Co. v. McAninch Corp., 424 N.W.2d 216 (Iowa 1988) the

Iowa Supreme Court held as follows:

In allocating that risk, courts have universally applied a rule first

expounded in a line of Supreme Court cases. The rule provides

that the government is not liable to a contractor for breach of

implied warranty unless it misrepresents material facts through

concealment or false statements. … In essence, this rule

establishes that no implied warranty will arise when the

government, in good faith, presents all of the information it has on

subsurface conditions to the contractor. Id. at 222.

The court also relied on the following statements from Spearin:

[T]he insertion of the articles prescribing the character, dimensions

and locations of the sewer imported a warranty that if the

specifications were complied with, the sewer would be adequate.

This implied warranty is not overcome by the general clauses

requiring the contractor to examine the site, to check up the plans,

and to assume responsibility for the work until completion and

acceptance. The obligation to examine the site did not impose upon

him the duty of making a diligent inquiry into the history of the

locality with a view to determining, at his peril, whether the sewer

specifically prescribed by the government would prove adequate.

The duty to check plans did not impose the obligation to pass upon

their adequacy to accomplish the purpose in view.

Lastly, relying on other authority, the court provided:

[G]eneral exculpatory clauses which disclaim any responsibility

for the accuracy of that data have been held to be of no effect when

the positive specifications made by the government were obviously

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intended to be used by the bidding contractors in formulating their

bids. Id. at 222.

• Implied Warranty of Accurate and Complete Bidding Information (Non-

disclosure of Material Facts)

The implied warranty that bidding information is accurate and complete is

found in Hollerbach v. U.S. 233 U.S. 165 (1914). The contractor alleged the

existing conditions were misrepresented in the bidding documents. The court

held:

[T]he specifications spoke with certainty as to a part of the

conditions to be encountered by the claimants. … this positive

statement of the specifications must be taken as true and binding

upon the Government … [U]pon it rather than upon the claimants

must fall the loss resulting from such mistaken representations. …

Id. 233 U.S. at 172.

“[A] contractor must prove the following elements by clear and

convincing evidence to recover additional compensation for extra work on a

construction contract: (1) the work was outside the scope of the construction

contract; (2) the extra items were ordered by the owner; (3) the owner agreed to

pay extra, either by his words or conduct; (4) the extras were not furnished by the

contractor as his voluntary act; and (5) the extra items were not rendered

necessary by any fault of the contractor.” 209 N. Walnut, L.L.C. v. Origin Fire

Prot., Inc., 2013 IL App (2d) 120831-U, ¶ 29 (citing A.W. Wendell & Sons, Inc. v.

Qazi, 254 Ill.App.3d 97, 104 (1993)).

“The contractor sustains this burden by proving that the extra work was

requested by the owner, and there is no evidence indicating that the work was

necessary or voluntarily performed due to fault by the contractor.” 209 N.

Walnut, L.L.C. v. Origin Fire Prot., Inc., 2013 IL App (2d) 120831-U, ¶ 29(citing

A.W. Wendell & Sons, Inc. v. Qazi, 254 Ill.App.3d 97, 104 (1993)).

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C. DELAY: EXCUSABLE, INEXCUSABLE OR CONCURRENT

Excusable and Inexcusable Delays

The construction contract usually includes a provision to determine if a delay is

excusable or not. Excusable delays are delays that result from events that are beyond the

contractor’s control such as: acts of God (force majeure); unanticipated severe weather;

unanticipated site conditions; design errors; labor disputes/strikes; and owner-directed

change orders. If these types of delays are encountered, the contract completion time

may be extended without compensation to the owner. Excusable delays may be further

clarified either as compensable or non-compensable as discussed below.

Inexcusable delays are delays caused by events that are within the control of the

contractor. Examples of these types of delays include: delays caused by anticipated

weather conditions; improper scheduling by the contractor; inadequate workforce; poor

supervision; and delays from defective work. These delays are often times compensable

to the owner by the payment of either liquidated damages or actual damages by the

contractor.

Compensable/Non-Compensable Excusable Delays

• An excusable, compensable delay is a delay solely caused by the owner or

its consultants and not caused by the contractor. The contractor may be

entitled to additional time to substantially complete the project and, based

upon the contract, additional compensation. Such delay could be the result

of: owner initiated changes; differing site conditions; design changes/error;

or other actions that are within the owner or its representatives’ control.

In the case of excusable, compensable delays, a contractor may be

compensated by the owner in the payment of additional money to the

contractor to cover its additional costs and overhead incurred as a result of a

longer project duration. Contractors can agree to make a compensable delay

a non-compensable one by waiving their right to delay damages in exchange

for an extension of time, and generally such waivers are valid. Mars

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Associates, Inc. v. City of New York, 70 A.D. 2d 839, 418 N.Y.S.2d 27 (1st

Dep’t 1979).

• Non-compensable excusable delays are delays to the project schedule but

are within the parties’ contemplation and not the fault of either party. These

include delays caused by: severe weather; other acts of God; and possibly

labor disputes. Such delays are beyond the control of the parties and,

therefore, neither should be compensated nor penalized. Although the

contractor is not entitled to extra compensation for non-compensable delays,

in most instances, it is entitled to an extension of the contract time.

• The contractor claiming excusable delay has the burden of proving the

delay. See R.P. Wallace, Inc. v. U.S., 63 Fed.Cl. 402, 409 (Fed.Cir. 2004)

(“The contractor must prove that the excusable event proximately caused a

delay to the overall completion of the contract, i.e., that the delay affected

activities on the critical path.”). Accordingly, it is important that the

contractor document the cause of the delay including how the delay

impacted its critical path, and provide timely notice under the contract

regarding the event causing the delay.

Inexcusable Delay – Compensation to Owner

In the case of inexcusable delays, the owner may be compensated by the payment

of damages incurred as a result of the delays. Often actual damages are difficult (if not

impossible) to calculate, and many construction contracts include a liquidated damages

provision. A liquidated damages provision allows the owner to be paid a sum certain for

each day a project is completed after the agreed upon project completion date.

Liquidated damages are discussed further in the Damages section below.

If the owner includes a liquidated damages provision in the contract, it must be

able to establish that the liquidated damages amount is reasonable and not generally

disproportionate to the actual loss or injury to be sustained in the event of delay.

Otherwise, a court may deem the liquidated damages clause to be void as an

unenforceable penalty. Rohauer v. Little, 736 P.2d 403 (Colo. 1987). If the liquidated

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damages provision is not enforced, the owner may still be entitled to recover its provable

actual damages.

Concurrent Delays

Concurrent delays occur when both parties bear some of the responsibility for the

construction delays or when there are multiple delays that occur during the same time

period. When both parties are at fault, most courts find that neither party is entitled to

damages. Courts may be willing to add time for the completion of the project. When

concurrent delays are experienced, the owner and the contractor each bear their own

costs resulting from the delay and may not seek recovery against each other.

Case Law Concerning Concurrent Delay

• In Blinderman Construction Co v. The United States, 695F.2d 552 (Fed. Cir.

1982) the contractor sought additional compensation and a time extension

regarding alleged delays to the completion date. The contract provided that an

adjustment should be made to the contract price for any increase in costs

caused by suspension, delay, or interruption by the government, but that “no

adjustment shall be made under this clause for any suspension, delay, or

interruption to the extent (1) that performance would have been so suspended,

delayed, or interrupted by any other cause, including the fault or negligence of

the Contractor or (2) for which an equitable adjustment is provided for or

excluded under any other provision of this contract.” The Court found that the

contractor contributed to the delays and held that:

“Where both parties contribute to the delay “neither can recover

damage, unless there is in the proof a clear apportionment of the delay

and the expense attributable to each party.” Coath & Goss Inc. v.

United States. 101 Ct.Cl.702, 714-15 (1944); Commerce International

v. United States. 167 Ct.CJ.529, 338 F.2d.81, 90 (1964).” Id. at 559.

The Court further provided:

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“Generally, courts will deny recovery where the delays are “concurrent

or intertwined” and the contractor has not met its burden of separating

its delays from those chargeable to the Government.” Id. at 559.

Accordingly, no damages are recoverable where apportionment is not

possible, but an extension of time can be granted in such a case.

• Greg Opinski Construction, Inc. v. City of Oakdale, 199 Cal. App. 4th 1107,

132 Cal. Rptr. 3d, 170 Court of Appeal, Fifth District, California (Oct. 6,

2011).

A contractor defended the imposition of liquidated damages by arguing that

the city had actually delayed the project. The court held otherwise:

“If the contractor wished to claim that it needed an extension of time

because of delays caused by the City, the contractor was required to

obtain a written change order by mutual consent or submit a claim in

writing requesting a formal decision from the engineer. It did neither.

The court was correct to rely on its failure and enforce the terms of the

contract. It makes no difference whether Opinski’s timely performance

was possible or impossible under the circumstances. The purpose of

[these] contract provisions … is to allocate to the contractor the risk of

delay costs – even for delays beyond the contractor’s control – unless

the contractor follows the required procedures for notifying the owner

of its intent to claim a right to an extension.”

. . .

“[The] City was entitled to liquidated damages for [the] general

contractor’s late completion under the construction contract, even if

the delays were caused by the City’s conduct, where the contract

required any extension of time to be obtained through certain

procedures, and [the] general contractor did not use such procedures.”

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Key Contractual Provisions Regarding Delay

Owners and contractors should consider the various time-related provisions in

their contract. In addition to the time for completion and liquidated damages provisions,

“time is of the essence,” “no damages for delay,” “waiver of consequential damages,”

“acceleration” and “termination” provisions should be considered. Inclusion of the “time

is of the essence” clause can establish each of the other time related clauses as material to

the contract. Kole v. Parker Yale Dev. Co., 536 P.2d 848 (Colo. App. 1975). Without a

“time is of the essence” provision, the other time and delay provisions may be deemed

immaterial.

Form Contract Provisions Regarding Delay

Based on AIA A201:

8.3 DELAYS AND EXTENSIONS OF TIME

§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress

of the Work by an act or neglect of the Owner or Architect, or of an employee of

either, or of a separate contractor employed by the Owner; or by changes ordered

in the Work as reflected in Change Orders approved by the Owner that provide

for the Contract Time to be extended; or by unavoidable delay as defined in

Section 8.3.4, then the Contract Time shall be extended by Change Order for

such reasonable time as is necessary to account for the impact of the delay on the

progress of the Work.

§ 8.3.2 Claims relating to time shall be made in accordance with applicable provisions

of Article 1 5.

§ 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by

either party under other provisions of the Contract Documents.

§ 8.3.4 For purposes of Section 8.3.1, “unavoidable delay” means only the following:

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.1 abnormally inclement weather, earthquake, flood, cloudburst, cyclone,

tornado, or other cataclysmic phenomenon of nature beyond the power of the

Contractor to foresee and defend against;

.2 acts of the federal, state, or local government;

.3 acts of a public enemy, including fires, explosions, chemical or

biological acts;

.4 acts of the Owner, including changes to the Work;

.5 actions of separate contractors or utility owners performing work on

the Project;

.6 late delivery of materials resulting from strikes, lock-outs, freight

embargoes, government acts, or sudden disaster of nature beyond the power

of the Contractor or supplier to foresee or forestall; or

.7 any other cause that the Contractor could not reasonably foresee at

the time it contracted, did not have the power to control or prevent, and

that occurs with no fault or negligence on the part of the Contractor or

anyone for whom the Contractor is liable.

§ 8.3.5 The Contractor shall not be entitled to an extension of the Contract Time

or additions to the Contract Sum for delays attributable to causes other than

those listed in Section 8.3.4, including without limitation, the following:

.1 commonly occurring conditions such as time for curing concrete,

drying of paint, and other foreseeable construction-related time

requirements;

.2 failure to provide sufficient forces and equipment to maintain

satisfactory progress;

.3 late or slow delivery of materials from the supplier or fabricator

when the material was available in warehouse stock, or when delivery was

delayed by reasons of late ordering, financial considerations, or other

causes within the power of the Contractor to avoid ; and

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.4 plant or equipment failure of less than four hours duration or of any

duration due to the Contractor’s failure to provide and maintain the

equipment in good mechanical condition, or to provide for immediate

emergency repairs.

D. DEFICIENT PLANS OR SPECIFICATIONS: DESIGN VS.

PERFORMANCE SPECIFICATION

Specifications are typically either design or performance. Design specifications

state explicitly how a contract is to be performed and permit no deviation. Stuyvesant

Dredging Co. v. United States, 438 F.2d 1576, 1582 (Fed. Cir. 1987). Design

specifications come with an implied warranty that if they are followed, the contractor can

produce the desired result. United States v. Spearin, 248 U.S. 132 (1918).

On the other hand, performance specifications specify the results to be obtained,

and leave to the contractor the responsibility of determining how to achieve the end

results. They do not come with any warranty. J.L. Simmons Co. v. United States, 412

F.2d 1360, 1362 (Ct. Cl. 1969).

“Design specifications explicitly state how the contract is to be performed and

permit no deviations. Performance specifications, on the other hand, specify the results

to be obtained, and leave it to the contractor to determine how to achieve those results.”

Martin K. Eby, 436 F.Supp.2d at 1308, n.47 (internal quotations and citation omitted).

Spearin

In Spearin, the Supreme Court held that “[t]his implied warranty [of the adequacy

of the plans and specifications] is not overcome by the general clauses requiring the

contractor to examine the site, to check the plans, and to assume the responsibility for the

work until completion and acceptance.” U.S. v Spearin, 248 U.S. at 137. The Court’s use

of the term “general clauses” suggests that specific clauses may shift the design

responsibility to the contractor. Courts may enforce specific contract terms that shift the

consequences and risk of design defects to contractors if the terms are unambiguous.

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If a provision expressly disclaims the owner’s responsibility for owner supplied

information, it may be upheld. The court in McDevitt v. Marriott, 713 F. Supp. 906 (E.D.

Va. 1989), aff’d in part, rev’d in part on other grounds, 911 F.2d 723 (4th Cir. 1990),

upheld a provision expressing disclaiming “any responsibility [of the owner] for the data

[in a soil report] as being representative of the conditions and materials which may be

encountered.”

When Does Spearin Apply?

The courts have “held that a Spearin-type warranty is implied only in design

specifications, not in performance specifications.” Lopez v. A.C. & S., Inc., 858 F.2d 712,

716 (Fed.Cir.1988). See Martin K. Eby Const. Co., Inc. v. Jacksonville Transp.

Authority, 436 F.Supp.2d 1276, 1308 (M.D. Fla. 2005) (“The purpose of the Spearin

doctrine is to allow contractors to recover when the government [owner] does not fulfill

the responsibility it has undertaken in preparing and supplying design specifications.”)

When the specifications are “performance” in nature, there is no government

liability, absent a finding that the government’s performance standards against which the

design is measured were impossible or commercially impracticable to meet.

Intercontinental Manufacturing Co., Inc. v. United States, 4 Cl. Ct. 591 (1984).

Once the specifications are characterized as design specifications, then the contractor

“must show by a preponderance of the evidence that [the alleged design defect] was the

most probable cause [for deficient performance] when considered with reference to other

possible causes.” Ordnance Research, Inc. v. United States, 609 F.2d 462, 479-80

(Ct.Cl.1979)

Contractor’s Duty of Reasonable Reliance

Before a contractor can rely on the Spearin doctrine it must demonstrate

reasonable reliance on the plans and specifications. A contractor’s reliance on the plans

and specifications is not reasonable when it has prior knowledge of the defects or it fails

to comply with the plans and specifications.

A contractor’s reliance upon the plans and specifications is not reasonable if the

design defect was so “glaring or obvious” that an ordinary contractor would have found it

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during bid preparation or before performance. A contractor has an implied duty to seek

clarification of a patent ambiguity before submitting its bid or beginning performance.

Graham Constr. Co., Inc. v. Earl, 362 Ark. 220 (2005).

Reasonable reliance may also be lacking if the contractor discovered or should

have discovered a defect in the plans and specifications during its site inspection. Failing

to conduct a pre-bid site inspection will preclude a contractor from reasonably relying on

defects in the plans and specifications that an ordinary contractor would have discovered

had it conducted the reasonable site inspection. Stuyvesant Dredging Co. v. United

States, 834 F.2d 1576 (Fed. Cir. 1987).

The Design Defect Must be Fundamental

Drawings that require repeated clarification is not necessarily an indication that

the drawings are defective. “The [owner’s] documents must be substantially deficient or

unworkable in order to be considered a breach of the contract. If there are many errors or

omissions in the specifications, the [owner] breached the contract if the cumulative effect

or extent of these errors was either unreasonable or abnormal taking into account the

scope and complexity of the project. . . . To prove that the plans [are] defective, it [must

be shown] that the plans were unworkable.” Caddell Constr. Co., Inc. v. United States,

78 Fed. Cl. 406, 413-415 (2007).

How many errors are enough? In Dugan & Meyers Construction Co. v. Ohio

Dept. of Administrative Services, 113 Ohio St. 3d 226 (2007), the Ohio Supreme Court

denied the contractor’s Spearin claim despite evidence of the inadequacy of the plans and

specifications that included untimely owner responses to hundreds of requests for

clarification and field work orders. The contract included a “no-damages-for-delay”

clause that limited the contractor’s damages to the remedy specified in the contract – an

extension of time.

Can the Specification Be Both?

In Fruin-Co/non Corp. v. Niagara Frontier Transportation Authority, 180 A.D.2d

222, 229, 585 N.Y.S.2d 248 (N.Y. App. Div. [4th Dep’t] 1992), the owner argued that the

contractual requirement that two new subway tunnels be “watertight” was a performance

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specification and that no implied warranty applied to the specifications. The court

disagreed, and held it was necessary to view the contract – at least the portion concerning

the shell to the subway tunnels – as a whole in order to determine the degree of discretion

the contractor was afforded to achieve watertight-ness. The court found that the

specifications provided no discretion to the contractor as to how to construct the shell.

Even though watertight-ness had to be achieved, the court held that the language was a

design specification. That would include an implied warranty from the owner that, so

long as the design specifications were followed, the contractor has no responsibility for

the ultimate success of the design. The contractor would be permitted to recover

compensation for extra work required to address the leaks.

E. DAMAGES

Liquidated Damages Provision

Owners frequently include (or a contractor in its subcontracts) a liquidated

damages provision for unexcused delays. Generally, it will be a per diem rate for each

day of project delay. Such provisions provide an express allocation of damages

associated with construction disputes, identify expectations for all parties, and lessen the

evidence which may be necessary to establish damages.

A key legal issue is whether the provision for damages is a valid liquidated

damages provision or an unenforceable penalty clause. Many courts have addressed the

issue – there is no litmus test. Generally, each one must be evaluated by its own facts and

circumstances. Some courts follow the Restatement (Second) of Contracts (1981), section

356, which provides as follows:

damages for breach by either party may be liquidated in the agreement

but only at an amount that is reasonable in the light of the anticipated or

actual loss caused by the breach and the difficulties of proof of loss. A

term fixing unreasonably large liquidated damages is unenforceable on

ground of public policy as a penalty. United States v. Bethlehem Steel

Co., 205 U.S. 105 (1907).

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Liquidated damages provisions should be a reasonable approximation of the

actual anticipated damages from the loss of use of the project. In reviewing if the amount

fixed as liquidated damages are actually approximates of anticipated losses, courts look

to when the parties made the contract, not when the contract was breached. Restatement

(Second) of Contracts § 356 cmt. B, at 158 (1981). Another key factor that is considered,

is whether or not the proof of actual loss would be difficult to establish. Grossinger

Motorcorp v. Am. Nat’l Bank & Trust Co., 240 Ill. App. 3d 737, 607 N.E.2d 1337 (1992).

Rohlin Case

A leading Iowa case frequently cited on the issue of liquidated damages is Rohlin

Constr. Co. v. City of Hinton, 476 N.W.2d 78 (Iowa 1991). In Rohlin, three contracts

for road construction included a liquidated damages provision of $400 per day for

late completion. In refusing to enforce the liquidated damages provision the court

provided:

There is no valid justification for the individual liquidated damage

amounts contained in each of the three contracts. Under the record of this

case, the person who set the $400-per-day amount in each contract is

unknown and was not called as a witness. Additionally, no witness was

called to justify the suggested liquidated damage amounts contained in the

DOT manual schedule.

. . .

We recognize that proving the amount of loss with any degree of certainty

is difficult; nevertheless, the amount of liquidated damages set in each

contract appears to be unreasonably large and goes far beyond the

anticipated loss caused by delay in performance of the contract. Id. at 81.

No Damage For Delay

The general rule in Iowa is “that a ‘No Damage’ clause in a contract is valid, but,

due to the harsh results induced thereby, will be strictly construed. However, where it

clearly appears that the contracting parties have so contracted, the same will be

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recognized…”. Owen Const. Co., Inc. v. Iowa State Dept. of Transp., 274 N.W.2d 304,

306 (Iowa 1979) citing Cunningham Bros., Inc. v. City of Waterloo, 117 N.W.2d 46, 49

(Iowa 1962).

Sample Clauses

No payment or compensation of any kind shall be made to the Contractor for

damages because of hindrance or delay from any cause in the progress of the work,

whether such hindrances or delays are avoidable or unavoidable;

or,

Contractor agrees that it may be subject to delay in the progress of the work and

that the sole remedy for such delay shall be an extension of time;

or,

In the event the subcontractor’s performance of this subcontract is delayed by acts

or omissions of the owner, contractor or other subcontractors, subcontractor may request

an extension of time for the performance of this subcontract, but shall not be entitled to

any increase in the subcontract price or to damages or additional compensation as a

consequence of such delays.

Other Authority

Generally, a no-damage-for-delay clause must be clear and unambiguous.

Williams & Sons Erectors, Inc. v. S.C. Steel Corp., 983 F.2d 1176 (2d Cir. 1993) (no-

damage-for- delay clause unenforceable where clause providing for payment of delay

impacts costs arising from change orders was also in contract); Gayon v. Bally’s Total

Fitness Corp., 802 So. 2d 420 (Fla. Dist. Ct. App. 2001) (“exculpatory clauses are

enforceable only where and to the extent that the intention to be relieved was made clear

and unequivocal in the contract, and the wording must be so clear and understandable

that an ordinary and knowledgeable party will know what he is contracting away”);

Forward Indus., Inc . v. Rolm of N.Y. Corp., 123 A.D.2d 374, 506 N.Y.S.2d 453 (1986)

(holding that no-damage- for-delay clause failed because it was not expressed in clear

and unequivocal language, but rather was obscured so as to make it probable that it would

escape the reader’s attention).

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In several states, no-damage-for-delay clauses in public contracts are void and

unenforceable. Minnesota and Missouri prohibit such clauses in public construction

contracts. In two states, Ohio and Washington, the clauses are unenforceable in both

public and private contracts.

Possible Defenses

• active interference, fraud, misrepresentation, other bad faith; or gross

negligence by the party seeking to enforce the no damage for delay clause;

• delay which has extended such an unreasonable length of time that the party

delayed would have been justified in abandoning the contract;

• delay that was not contemplated by the parties; and

• delay resulting in a breach of a fundamental obligation of the contract.

Active interference was used as the defense to a no-damages-for-delay clause in

Peter Kiewit Sons’ Co. v. Iowa Southern Utilities Co., 355 F. Supp. 376 (S.D. Iowa

1973). The court held that to be found to have committed active interference, the public

agency would need to commit “some affirmative, willful act, in bad faith, to

unreasonably interfere with plaintiff’s compliance with the terms of the construction

contract.”

The no-damage-for-delay clause is meant to cover “only those delays that are

reasonably foreseeable, arise from the contractor’s work during performance, or which

are mentioned in the contract.” U.S. v. Merit Meridian Constr. Corp. v. City of New

York, 493 N.E.2d 905, 910 (N.Y. 1986). Reasonable foreseeability includes looking at

the relationship of the parties, the objectives, and the surrounding circumstances. J & B

Steel, 642 N.E.2d 1215, 1222 (Ill. 1994).

If the delay is so long that it basically leads to abandonment of the project, the no-

damage-for-delay clause will not be enforced. As for the length, the length of the delay is

to be compared to the total time period for completion of a project. Thus no slight delay

will do. The delay must be “so extreme as to be a kind not contemplated” under the

contract. Dickinson Co. v. Iowa State Dept. Of Transp., 300 N.W.2d 112, 114-15 (Iowa

1981).

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Consequential Damages Provisions

Statutes and contracts will often use the term “consequential damages” but the

parties may not agree on what that means. A basic definition provides: “losses that do

not flow directly and immediately from an injurious act but that result indirectly from the

act.” Black’s Law Dictionary 416 (8th ed. 2004). Sometimes a contract will use the

terms “indirect” or “special” or maybe all three. Generally, the authorities treat them

much the same.

Owners will claim that things such as extended overhead, lost profits, additional

financing costs, and loss of use are within the contemplation of contractors as they

calculate potential losses. Contractor’s may claim loss of reputation, loss of bonding

capacity, extended general conditions and loss of business opportunity. Bruner and

O’Connor suggest that “foreseeability” might be viewed more broadly in modern

construction contracts than in other commercial contracting relationships for several

reasons:

• the sophistication of the parties;

• the detail with which construction contracts are prepared;

• the flexibility built into construction contracts to make changes or to give

definition to contract requirements during construction;

• the frequent practice of giving contractual definition to the type and amount of

damages awarded for certain breaches;

• the recognized “hurly-burly” of the construction process; and

• the common industry appreciation for the likely consequences of most

breaches.

Bruner & O’Connor on Construction Law § 19.18.

The AIA Approach

§ 15.1.6 Claims for Consequential Damages.

The Contractor and Owner waive Claims against each other for

consequential damages arising out of or relating to this Contract. This

mutual waiver includes:

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.1 damages incurred by the Owner for rental expenses, for losses of

use, income, profit, financing, business and reputation, and for loss of

management or employee productivity or of the services of such persons;

and

.2 damages incurred by the Contractor for principal office expenses

including the compensation of personnel stationed there, for losses of

financing, business and reputation, and for loss of profit except anticipated

profit arising directly from the Work.

This mutual waiver is applicable, without limitation, to all consequential

damages due to either party's termination in accordance with Article 14.

Nothing contained in this Section 15.1.6 shall be deemed to preclude an

award of liquidated direct damages, when applicable, in accordance with

the requirements of the Contract Documents.

Some commentators attribute the AIA’s inclusion of the mutual waiver of

consequential damages to the Perini case. In 1983, Perini entered into a contract to be

the construction manager for the Sands Hotel renovation in Atlantic City. Perini’s fee

was to be $600,000 plus reimbursable expenses. Perini was ordered to pay $14.5 million

in damages to the owner in lost profits in arbitration. Arbitration lasted over two months

and there were over two dozen witnesses. Perini Corporation v. Great Bay Hotel &

Casino, Inc., 610 A.2d 364 (N.J. 1992).

Iowa courts will enforce a consequential damages waiver. In Polar Insulation,

Inc. v. Garling Construction, Inc., No. 15-1501 (Iowa Ct. App. October 26, 2016), the

court held:

The Iowa Supreme Court has implicitly endorsed contractual limitations on

consequential damages in the sales context. See Shinrone, Inc. v. Tasco,

Inc., 283 N.W.2d 280, 285 (Iowa 1979) (“Any seller who does not wish to

take the risk of consequential damages has available the section on

contractual limitation of remedy.” (citation omitted)). We see no reason the

same limitation would not be available here. Section 14.2 was clear, and

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we agree Polar waived its right to consequential damages. Therefore, we

affirm the district court’s grant of summary judgment on Polar’s

consequential damages claim.

* * *