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Construction Law: An Introduction for Engineers, Architects, and Contractors

ISBN: 978-1-118-22903-3
312 pages
October 2012
Construction Law: An Introduction for Engineers, Architects, and Contractors (1118229037) cover image
For a construction business to function properly, architects, engineers, and contractors need to understand how the various state and federal laws affect their business and how to avoid disputes and exposure to liability. This book offers a comprehensive review of the US legal environment, both criminal and civil, focusing on the key legal concepts and issues applicable to a typical construction project. Construction professionals will find clear, concise introduction to a wide range of contractual issues related to project participants, as well as issues related to the actual construction and litigation.
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Preface xix

1 Law and Government 1

1.1 Introduction / 1

1.1.1 The Powers of Governments / 1

1.1.2 City and County Governments / 2

1.1.3 The Powers of the Federal Government / 2

1.2 The Sources and Hierarchy of Law / 3

1.2.1 The Constitution / 3

1.2.2 Statutes and Ordinances / 3

1.2.3 Agency Regulations / 4

1.2.4 International Treaties / 4

1.2.5 Appellate Court Opinions / 4

1.3 The American Judicial System / 4

1.3.1 Structure of the Court Systems / 5

1.3.2 Federal Trial and Appeals Courts / 5

1.3.3 State Trial and Appeals Courts / 6

1. 4 Common Law / 6

1.4.1 Stare Decisis / 7

1.4.2 Restatements of the Law / 7

1.5 Legal Codes / 8

1.5.1 Uniform Codes / 8

1.5.2 The Uniform Commercial Code / 9

1.6 Legal Doctrines / 9

1.7 Choice-of-Law Clauses / 10

1.8 Criminal Law versus Civil Law / 11

1.9 Cause of Action / 11

1.10 Summary Judgment / 12

2 Basic Legal Principles 15

2.1 Legal Issues in Construction / 15

2.2 Principles of Contract Law / 15

2.2.1 Unilateral Contracts versus Bilateral Contracts / 16

2.2.2 Oral Contracts / 16

2.2.3 Third-Party Benefi ciaries / 17

2.2.4 Contract Interpretation / 17

2.3 Principles of Agency Law / 21

2.3.1 Apparent Authority / 21

2.3.2 The Principal’s Liability for the Agent’s Acts / 22

2.3.3 Ratifi cation / 22

2.4 Principles of Tort Law / 23

2.4.1 Intentional Torts / 23

2.4.2 Unintentional Torts (Negligence) / 23

2.4.3 Strict Liability / 27

2.4.4 Misrepresentation / 28

3 Project Participants 29

3.1 The Owner / 29

3.1.1 Access to the Building Site / 30

3.1.2 Restrictions on Use of the Property / 31

3.2 The Design Professional Team / 31

3.2.1 Site Evaluation Consultants / 32

3.2.2 The Geotechnical Consultant / 33

3.3 The Construction Team / 33

3.3.1 Subcontractors and Suppliers / 34

3.4 Construction Lenders / 34

3.4.1 Collateral Assignment to Lender / 35

3.4.2 Other Lender Requirements / 35

3.4.3 Construction Loans / 36

3.4.4 Bond Financing / 37

4 Project Delivery Systems 39

4.1 Design-Bid-Build / 39

4.2 Multiple Primes / 41

4.3 Construction Management / 41

4.3.1 Agency Construction Management / 42

4.3.2 Construction Management At-Risk (CMAR) / 42

4.4 Design-Build / 43

4.4.1 Design-Build Proposals / 44

4.4.2 Advantages and Disadvantages of Design-Build / 45

4.4.3 Bridging Consultants / 46

4.5 Engineer-Procure-Construct (EPC) / 46

4.6 Turnkey Construction / 47

4.7 Integrated Project Delivery (IPD) / 47

4.8 Fast-Track Construction / 47

4.9 Public-Private Partnerships / 48

4.9.1 History of Public-Private Partnerships / 49

4.9.2 Constraints on Public-Private Partnerships / 49

5 Construction Contracts 51

5.1 The Construction Contract / 51

5.1.1 Prebid Conferences / 51

5.1.2 Right to Reject Bids / 52

5.2 The Contract Documents (Owner-Contractor) / 52

5.2.1 The Contractor’s Bid / 53

5.3 Confl icts between the Documents / 54

5.4 Errors in the Documents / 54

5.4.1 Latent Discrepancies / 55

5.5 Specific over General; Written over Printed / 56

5.6 Interpretation against Drafter / 56

5.7 Specifications / 57

5.8 Description of the Work under a Construction Contract / 57

5.9 Third-Party Beneficiaries / 58

5.10 Industry Standard Forms versus Custom Forms / 58

5.10.1 Drafting Custom Forms / 59

5.10.2 AIA Contract Documents / 60

5.10.3 Engineers Joint Contract Documents Committee (EJCDC) / 62

5.10.4 ConsensusDOCS / 63

5.10.5 Comparing the AIA, EJCDC, and ConsensusDOCS Documents / 64

5.10.6 AGC Forms / 65

5.10.7 Other Industry Standard Forms / 65

5.11 Commencement of Work Prior to Contract / 65

5.11.1 Letters of Intent / 66

6 The Design Process 67

6.1 Design Responsibilities / 67

6.1.1 Contractor’s Responsibility for Design / 67

6.1.2 Value Engineering / 68

6.2 The Owner’s Program / 68

6.3 The Design Agreement (Owner-A/E) / 68

6.3.1 Schematic Design Phase / 69

6.3.2 Design Development Phase / 69

6.3.3 Construction Documents Phase / 69

6.3.4 Bidding or Negotiation Phase Services / 70

6.3.5 Construction Phase Services / 70

6.3.6 Basic Services versus Additional Services / 71

6.3.7 The A/E’s Compensation / 71

6.4 Standard of Care Applicable to Design Services / 71

6.4.1 Contractual Standard of Care / 72

6.4.2 Proving Violation of the Standard of Care / 73

6.4.3 Implied Warranties / 73

6.4.4 Designing to the Owner’s Budget / 74

6.4.5 The A/E’s Liability for its Estimate / 74

6.5 Ownership of the Design Documents / 75

6.5.1 Use of the Plans and Specifi cations / 75

6.6 Termination of the Design Agreement / 76

7 The Procurement Process 77

7.1 Selection of Contractors for Public Projects / 77

7.1.1 The Bid Package / 78

7.1.2 Duty to Award to the Lowest Bidder / 78

7.1.3 Bid Responsiveness / 78

7.1.4 Responsible Bidder / 79

7.1.5 Bid Protests / 80

7.1.6 Bid Security / 81

7.1.7 “Best Value” Awards / 81

7.2 Selection of Design Professionals / 82

7.3 Alternatives to Design-Bid-Build in the Public Sector / 83

7.3.1 Design-Build Construction in the Public Sector / 83

7.4 The Federal Acquisition Regulation (FAR) / 84

7.5 Procurement on Private Projects / 85

8 Pricing Construction Projects 87

8.1 Fixed-Price Contracts / 87

8.1.1 Fundamental Characteristic of a Fixed-Price Contract / 87

8.1.2 Allowances / 88

8.1.3 Material Price Escalation Clauses / 88

8.1.4 Index Pricing / 89

8.2 Cost-Plus Contracts / 89

8.2.1 Labor / 90

8.2.2 Subcontracted Work / 90

8.2.3 Heavy Equipment / 91

8.2.4 Small Tool Allowance / 91

8.2.5 Reasonableness or Necessity of Costs Incurred / 91

8.2.6 Contractor’s Overhead and Profi t / 92

8.2.7 Estimates and Cost-Plus Contracts / 92

8.2.8 Timely Payment Discounts / 93

8.2.9 Audit Rights / 93

8.3 Cost-Plus with Guaranteed Maximum Price / 93

8.4 Unit-Price Contracts / 94

8.4.1 Variation in Estimated Quantities (VEQ) Clauses / 94

8.5 Unbalanced Bidding / 95

8.6 Bidding When the Design Is Incomplete / 96

9 Subcontractors and Suppliers 97

9.1 Subcontractors versus Suppliers / 97

9.2 Owner’s Control over Subcontractor Selection / 98

9.3 Subcontractor Bids / 98

9.3.1 Enforcing a Subcontractor’s Bid / 99

9.3.2 The Subcontractor’s Right to Enforce Its Bid / 100

9.4 Incorporation by Reference / 100

9.5 Flow-down and Flow-up Provisions / 101

9.5.1 Rights and Liabilities of the Parties under Flow-down Provisions / 101

9.6 Duty to Cooperate and Coordinate Subcontract Work / 102

9.6.1 Limiting the Liability for Coordination / 102

9.6.2 Coordination of Multiple Primes / 103

9.7 Subcontractor Payment / 103

9.7.1 “Pay-If-Paid” versus “Pay-When-Paid” / 104

9.8 Subcontractor Claims against the Owner / 105

9.8.1 The Pass-through System / 106

9.8.2 Liquidating Agreements / 106

9.9 Conditional Assignment of the Subcontracts to the Owner / 107

9.10 Minority and Disadvantaged Business Programs / 108

9.10.1 Federal Minority and Disadvantaged Business Programs / 109

9.10.2 Agency DBE Programs / 111

10 Time for Performance 113

10.1 Time Is of the Essence / 113

10.1.1 Time-Is-of-the-Essence Clauses in Construction Contracts / 114

10.2 Date of Commencement/Time for Completion / 114

10.2.1 Delays in Commencement of the Work / 115

10.2.2 Waiver of Time for Completion / 115

10.3 Substantial Completion / 116

10.3.1 The Signifi cance of Substantial Completion / 116

10.3.2 Establishing Substantial Completion / 117

10.4 Final Completion/Final Payment / 117

10.4.1 Acceptance of Defective Work / 118

10.5 Delays / 119

10.5.1 Determining Whether a Delay Was within a Party’s Control / 120

10.5.2 Delays Due to Weather / 121

10.5.3 Concurrent Delays / 122

10.6 Liquidated Damages / 122

10.7 Constructive Acceleration / 124

10.8 Right to Finish Early / 124

10.9 Milestones / 125

11 Construction Scheduling 127

11.1 Bar Charts / 127

11.2 Critical Path Scheduling / 128

11.2.1 Activity Logic / 128

11.2.2 Arrow Diagramming / 128

11.2.3 Precedence Diagramming / 129

11.2.4 As-Planned (Baseline) Schedule / 129

11.2.5 Float / 130

11.2.6 Critical Path / 130

11.2.7 Multiple Calendars / 131

11.3 Scheduling Specifi cations / 131

11.4 Schedule Updates / 132

11.5 Resource Leveling / 132

11.6 CPM-Based Methods for Proof of Delay Claims / 133

11.6.1 Total Time Analysis / 133

11.6.2 Impacted As-Planned (“What-If ”) / 134

11.6.3 Collapsed As-Built (“But For”) / 134

11.6.4 As-Planned versus As-Built / 134

11.6.5 Windows Analysis / 135

11.7 Expert Witness Testimony / 135

11.8 Using CPM to Estimate Extensions of Time / 136

11.9 Using Bar Charts to Prove Delay Claims / 137

12 Contract Administration 139

12.1 The A/E’s Role in Contract Administration / 139

12.2 A/E’s Liability for Contract Administration / 140

12.2.1 Approval of Shop Drawings and Other Submittals / 140

12.2.2 Site Visits and Inspections / 141

12.2.3 AIA B101 Provisions / 142

12.2.4 The Right to Stop Work / 142

12.2.5 Approval of Progress Payments / 143

12.2.6 Responding to Change Order Requests / 144

12.2.7 Requests for Information, Interpretations, and Clarifications / 144

12.3 A/E’s Role in Contractor Termination / 144

12.4 Initial Decision Maker (IDM) / 145

13 The Payment Process 147

13.1 Progress Payments / 147

13.1.1 Schedule of Values / 147

13.1.2 The Application for Payment / 148

13.1.3 Certifi cation of Payment / 148

13.2 Retainage / 149

13.2.1 Payment of Subcontractor’s Retainage / 150

13.2.2 Claims on Retainage / 150

13.3 Accord and Satisfaction / 150

13.3.1 Payment of an Accord by Check / 151

13.4 Joint Checks / 152

13.4.1 Joint Payee versus Alternative Payee / 152

13.5 Title Insurance / 152

13.6 Obligations of the Lender / 153

13.7 Evidence of Financing / 153

13.8 Prompt Payment Acts / 154

13.8.1 The Progress Payment Request / 154

13.8.2 Payment on Subcontracts / 154

13.9 The Owner’s Payment Obligation on Private Construction / 155

13.10 The False Claims Act / 155

13.10.1 Liability for False Claims / 156

13.10.2 Prosecution of False Claims / 156

13.10.3 State False Claims Act / 157

14 Changes to the Work 159

14.1 Contract Changes / 159

14.1.1 Construction Change Directives / 160

14.2 Pricing Change Orders / 160

14.2.1 Determination of Price by a Third Party / 161

14.2.2 Schedule Adjustments / 161

14.3 Constructive Changes / 161

14.3.1 Owner’s Direction or Improper Rejection of Work / 162

14.3.2 Notice Requirements for a Constructive Change / 162

14.3.3 Waiver of Notice Requirement / 163

14.3.4 Extra Work versus Additional Work / 163

14.4 Federal Government Contracts / 163

14.4.1 Equitable Adjustments / 164

14.4.2 Escrow of Bid Documents / 164

14.5 Authority to Issue Changes / 165

14.5.1 Apparent Authority and Ratification / 165

14.6 Duty to Perform the Changed Work / 166

14.7 Reservation of Rights / 166

14.8 Changes Clauses in Subcontracts / 168

14.9 Documentation of Costs / 168

14.10 Cardinal Changes / 169

14.10.1 The Contractor’s Options / 169

15 Differing Site Conditions 171

15.1 The Purpose of the Differing Site Conditions Clause / 171

15.2 Differing Site Conditions Claims / 172

15.2.1 Type I—Conditions Materially Different Than Indicated / 172

15.2.2 Type II—Conditions of an Unusual Nature / 173

15.3 Limitations on Claims for Differing Site Conditions / 174

15.3.1 Duty to Make a Site Inspection/Duty to Investigate / 175

15.3.2 Disclaimers / 175

15.3.3 Notice / 177

15.3.4 Waiver of Claims / 177

15.4 Variations in Estimated Quantities Clause / 177

15.5 Geotechnical Baseline Summary Report / 178

15.6 Hazardous Materials / 178

15.7 Tort and Breach-of-Contract Actions / 178

15.7.1 Misrepresentation (Intentional or Negligent) / 179

15.7.2 Owner’s Breach of Implied Warranty of Plans and Specs / 179

15.7.3 Failure to Disclose Superior Knowledge / 179

15.7.4 Mutual Mistake / 180

16 Termination of the Construction Contract 181

16.1 Unilateral Termination / 181

16.2 Contractual Termination Provisions / 182

16.3 Termination by the Contractor for Cause / 182

16.4 Termination by the Owner for Cause / 183

16.4.1 Notice and Opportunity to Cure / 183

16.5 Wrongful Termination / 184

16.6 The Role of the Performance Bond Surety / 185

16.7 Termination for Convenience / 186

17 Mechanic’s Liens 187

17.1 Purpose of a Mechanic’s Lien / 187

17.2 Procedures for Filing a Lien / 188

17.3 Lien Entitlement / 188

17.3.1 Liens for Services / 189

17.3.2 Liens for Materials / 189

17.4 Enforcement of the Lien / 190

17.4.1 Priorities / 190

17.4.2 Bonding Off / 191

17.5 Interests Subject to a Lien / 191

17.5.1 Subcontractor and Supplier Claims / 192

17.5.2 Amount of the Lien / 192

17.6 Lien Waivers / 193

17.6.1 No-Lien Contracts / 194

17.7 Rights of Owners and Third Parties / 194

17.8 The Effect of Bankruptcy on a Mechanic’s Lien / 194

17.9 Trust Fund Statutes / 195

17.10 Stop Notices / 195

17.11 Liens on Public Property / 195

18 Construction Insurance 197

18.1 Types of Insurance / 197

18.2 Commercial General Liability / 198

18.2.1 Bodily Injury and Property Damage / 198

18.2.2 Exclusions to Coverage / 199

18.2.3 Additional Insured Status / 200

18.3 Builder’s Risk Insurance / 200

18.4 Workers’ Compensation Insurance / 201

18.5 Professional Liability Insurance / 201

18.6 Wrap-up Insurance Programs / 202

18.7 Waiver of Subrogation / 202

19 Surety Bonds 205

19.1 Use of Surety Bonds in the Construction Industry / 205

19.1.1 Bid Guarantees / 206

19.1.2 Payment Bonds / 206

19.1.3 Performance Bonds / 208

19.2 Rights and Remedies of Sureties / 208

19.2.1 Indemnity Agreements / 209

19.2.2 Discharge of the Surety’s Obligations / 209

19.3 Bonding Requirements / 210

20 Liability for Defective Construction 211

20.1 Determining Liability / 211

20.2 Owner Claims against the Contractor / 212

20.2.1 Warranties / 212

20.2.2 Notice Requirements / 213

20.2.3 Tort Claims / 213

20.3 The Spearin Doctrine / 214

20.3.1 Application of the Spearin Doctrine / 214

20.3.2 Limitations on Spearin / 215

20.4 The A/E’s Liability for Defective Construction / 216

20.5 Affi rmative Defenses / 217

20.5.1 Statutes of Limitation / 217

20.5.2 Statutes of Repose / 218

21 Calculations of Damages 221

21.1 Compensatory Damages / 221

21.1.1 Consequential Damages / 222

21.2 Punitive Damages / 222

21.3 Duty to Mitigate Damages / 223

21.4 Owner’s Damages / 223

21.4.1 Owner’s Damages for Late Completion / 223

21.4.2 Economic Waste / 224

21.4.3 Betterment / 224

21.5 Contractor’s Damages / 226

21.5.1 Equipment Costs / 226

21.5.2 Home Offi ce Overhead / 227

21.5.3 Cost Increases for Labor and Materials / 228

21.5.4 Methods of Estimating Loss of Productivity / 228

21.6 Limitation of Liability / 230

21.6.1 Exculpatory Clauses / 230

21.6.2 Indemnifi cation Agreements / 231

21.6.3 Limitation-of-Liability Clauses / 232

21.6.4 Waiver of Consequential Damages / 233

21.7 Specifi c Performance / 234

21.8 Tort Claims / 234

21.9 Recovery of Damages in the Absence of an Express Contract / 235

21.9.1 Reliance Interest—Promissory Estoppel / 235

21.9.2 Implied-in-Fact Contracts—Quantum Meruit / 236

21.9.3 Restitution Interest—Unjust Enrichment / 236

21.9.4 Quantum Meruit versus Unjust Enrichment / 237

22 The Economic Loss Doctrine 239

22.1 Tort versus Contract Law / 239

22.1.1 Definition of Economic Loss / 240

22.1.2 Development of the Economic Loss Doctrine / 240

22.1.3 Basis for the Doctrine / 241

22.1.4 Public Policy Considerations / 241

22.1.5 Strict Application of the Doctrine / 242

22.1.6 Exceptions to the Economic Loss Doctrine / 242

22.2 Claims of Defective Construction Products / 243

22.2.1 Damage to Other Property / 244

22.3 Claims of Defective Construction Services / 244

22.3.1 Claims of Defective Design Professional Services / 245

22.4 Potentially Dangerous Products (Risk of Harm Exception) / 246

22.5 Negligent Misrepresentation / 247

22.5.1 Negligent Misrepresentation Claimants / 247

22.5.2 Tort versus Contract Claims for Negligent Misrepresentation / 248

23 Alternative Dispute Resolution 249

23.1 Arbitration / 249

23.1.1 Arbitration Clauses / 250

23.1.2 Arbitration Statutes / 250

23.1.3 Arbitration Organization Rules / 251

23.1.4 Prehearing Activities / 251

23.1.5 Selection of Arbitrators / 252

23.1.6 The Arbitration Hearing / 252

23.1.7 The Award / 252

23.1.8 Appealing the Award / 253

23.1.9 Costs of Arbitration / 254

23.1.10 Typical Schedule for Arbitration / 254

23.1.11 Joinder and Consolidation / 254

23.1.12 Waiver of Arbitration Rights / 255

23.1.13 Effect of Arbitration on the Surety / 256

23.2 Litigation versus Arbitration / 256

23.3 Mediation / 257

23.4 Other Types of Alternative Dispute Resolution / 258

23.4.1 Med/Arb / 258

23.4.2 Mini-Trial and Summary Proceedings / 258

23.4.3 Dispute Resolution Boards / 259

23.4.4 Standing Neutrals / 260

23.5 Dispute Prevention / 260

Appendix A: List of Abbreviations 261

Appendix B: Table of Cases 265

Appendix C: Understanding Case Citations 267

Glossary 271

Index 279

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Gail S. Kelley is a Professional Engineer and LEED Accredited Professional as well as a licensed attorney in Maryland and the District of Columbia. Gail has an extensive background in design and construction having worked in construction management, structural design, and structural evaluation.

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