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D4COST Software


Who Is Managing Your Contract Risks?  
By Carrie L. Ciliberto, Esq.

One of the most important things to consider before signing a design or construction contract is whether the agreement properly allocates project risks. While it can’t be known in advance which contract provision will be most critical in the event of a dispute, certain known risks can, and should, be addressed prior to signing. One way to minimize your risk, and maximize project success, is to use contracts that are fair to all parties. Traditionally, contracts were drafted by one party, to the benefit of that party, and then the adversarial negotiations began. This old-school method of contracting is neither efficient nor generally successful in facilitating positive relationships or results. Now, the industry has a clear choice with ConsensusDocs industry standard contracts. ConsensusDocs are the only standard contracts written by a coalition of 40+ leading design and construction industry associations that focus on project goals versus the protection of one party. Several contract provisions that address risk allocation, often called contract “killer clauses”, are discussed below, and ConsensusDocs will be used to illustrate best practices regarding these contract provisions.

Owner Financial Information: Does the contract provide adequate opportunities to request owner financial information throughout the life of the project? Some standard contracts provide the opportunity for owner financial information requests at the beginning of the project, but often that opportunity is lost, at least in practical terms, once construction begins. The ConsensusDocs 290 Guidelines for Obtaining Owner Financial Information, and 290.1 Financial Questionnaire provide an easy and direct way for contractors to quickly determine the financial viability of projects. The 290 expressly highlights, “[i]n any contractual venture, each Party has a legitimate interest and responsibility in ascertaining whether the other Party is fully capable of performing all of its contractual obligations…The proven ability to pay is just as important as the proven ability to perform.”

The Douglas and Nancy Barnhart Cancer Center at Sharp Hospital in Chula Vista, CA is a good example of a successful ConsensusDocs-based project. The owner used the ConsensusDocs 240 Agreement Between Owner and Design Professional and the ConsensusDocs 500 Agreement and General Conditions Between Owner and Construction Manager to facilitate the design and construction of a 47,000 square foot, three-story medical center featuring advanced cancer treatment technology and a new healing environment, which includes the first Varian Medical Systems’ TrueBeam STx™ radiotherapy/radiosurgery system in San Diego. The construction was part of a design-build development by Makena Medical. "In my 30+ years of construction, I have used many types of contracts,” states Douglas E. Barnhart, Manager of Makena Medical Buildings and past president of AGC National. “ConsensusDocs offered a straightforward and fair contract document set.”

Unknown Site Conditions: In general, contractors should make sure, whenever possible, that the risk of unknown site conditions does not fall to them. If that risk shifts from the owner to the contractor, the contractor needs to carefully evaluate the potential liability that could arise from such unknowns, and the proposed schedule and pricing should reflect those unknown risks as much as possible. For example, generally contractors should not take on the role of site and site document inspectors. Good contracts hold a contractor liable for only what can be observed by a reasonable inspection of a project site’s surface conditions and relevant documents provided by the owner, but no independent subsurface exploration is expected of the contractor. If the contract requires a review and comparison of contract documents to uncover errors, or to verify site conditions or reports on site conditions, the contractor is undertaking a risk that is likely not desirable and possibly not insurable. For example, if a provision states that “the contractor has reviewed the site and applicable documents and is satisfied that the contractor’s pricing is sufficient to cover all work, including all foreseen or unforeseen risks, including any concealed or subsurface variances”, the contractor is likely taking on an unnecessary and burdensome risk, especially in regard to the italicized language. In general, the Owner is in the best position to know or have actual site conditions documented, and to bear the risk of unknown variances. Most owners do not want contractors including sizeable contingencies in their bids to cover unknown site conditions, and many contractors are not in the best position to assume those risks. The ConsensusDocs 200 Owner and Constructor Agreement provides a good
example of fair risk allocation.

Order of Precedence: It is critical to have an established order in which contract documents will be given weight in the event of a conflict. As a project progresses, there can be changes made along the way that necessarily create conflicting contract documents. Such documents can include supplemental instructions and responses to RFI’s, and even verbal directives from architects, engineers or owner representatives. The “golden rule” (He who has the gold, makes the rules.) is not a best practice. Owners and Contractors should be mindful and insist that any change in scope be memorialized in a written change order. ConsensusDocs contracts provide a clear order for interpreting conflicting documents, which helps avoid unnecessary delay and expense. In general, the most recent contract documents govern with change orders being paramount. The thought being that while the parties may have understood the project needs at the time of contract signing, project developments, whether they be based on site specifics, evolving owner needs, revised designs, financial considerations or other issues, sometimes project needs must change. If that is the case, it is important that the change order detail those project changes and any related effects on price or schedule. Change orders should always be in writing and signed by the relevant parties. As such, in the event of a dispute, the more recent change order should be given more weight than a conflicting provision in a contract that was signed in the past.

The ConsensusDocs project history web page includes a project from Michigan State University’s Shaw Hall project. Jack Mumma, MSU’s Construction Contract Administrator comments, “We believe it is the only full IPD agreement signed by a public university.” Integrated project delivery (IPD) is a project where the owner, contractor and design professional all sign the same agreement. MSU chose to use the ConsensusDocs 300 Standard Tri-Party Agreement for IPD for the project, which achieved LEED gold certification.

Communication, Dispute Mitigation and Resolution: The best time to determine the process for addressing and resolving issues and disputes is before they arise. ConsensusDocs provides a multi-tiered process to address issues, and focuses on open and direct communications. Rather than the traditional silo and funnel approach to project communications, ConsensusDocs emphasizes direct communications at the first instance, with a tiered acceleration process. This provides for quicker resolution of issues before they escalate into intractable claims. All parties benefit from clear, direct and efficient issue resolution through the minimization of misunderstandings, miscommunications, unnecessary meetings, delays and disruptions.

Temecula Valley Hospital in Temecula, CA is another example of a successful ConsensusDocs-based project. The ConsensusDocs 300 Tri-Party Agreement for Integrated Project Delivery (IPD) was used with seven signers including owner, designer, contractor, mechanical/plumbing, electrical, fire protection and drywall trades. The 180,000-squre-foot, 140 bed, acute care hospital features all private rooms and a 20-bed intensive care unit, as well as six high-tech surgical suites, digital imaging and an advanced electronic clinical information system. “The owner wanted a team that could deliver a hospital that was 30% less in cost and 30% more efficient than any systems best performing facility than the average California hospital”, states Steven Wilson Associate DBIA™, Principal at HMC Architects. “The owner also wanted it to be the fastest to market from design to completion, and assembled a highly collaborative team and established a risk/reward contract using the ConsensusDocs 300, which would guarantee all signers labor cost, but require a guaranteed price by putting our profits into one pool. This arrangement would insure collaboration and innovation from all signers to meet the requirements of budget and schedule while adhering to the owners establish conditions of satisfaction.”

An agreement with provisions that shift risk inappropriately can negatively impact project price, schedule, project team and overall success. These unwanted consequences can be mitigated by using a contract that puts responsibility on the party in the best position to manage the risk.

In the end, by thoroughly vetting a contract before signing, contractors will better understand their roles, responsibilities and potential liabilities. ConsensusDocs are the first and only consensus standard contracts written by and for designers, owners, contractors, subcontractors and sureties, and puts the project goals as the baseline. Recognizing that every project is unique, ConsensusDocs are Microsoft Word®-based for ease of modification. A fair and balanced contract helps contractors procure the best team and the best pricing to provide better project results; and, better project results facilitate future business.

About the author: Carrie L. Ciliberto, Esq. is Senior Director and Counsel of Contracts and Construction Law for the Associated General Contractors of America (AGC), and Deputy Executive Director for ConsensusDocs - the only standard contracts written by a coalition of 40+ design and construction industry organizations. Ms. Ciliberto was the principal of Ciliberto & Associates, LLC, providing natural resources, environmental and water law counsel for 10+ years. She is licensed in Colorado, DC, and federal courts including the U.S. Supreme Court. She frequently speaks at industry events around the nation and has authored numerous industry articles.

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