Expect the Best, Prepare for the Worst - Drafting Construction or Design Contracts

When drafting a construction or design contract, it is easy to be carried away by enthusiasm: “This is going to be an exciting project, and we are all going to make money!” It is tempting to fill the contract with provisions about how the parties will work together, consult with one another, and make consensus decisions. At such moments, the construction lawyer can feel like the slave in the Roman triumphal procession whose job is to whisper to the victorious general, “memento mori,” which means roughly “remember that failure is an option.” This is valuable advice in the construction/design context. As long as the parties get along and the project is successful, a written contract is hardly needed because everyone agrees about what should happen next. But when the project gets in trouble and the cooperative relationship falters or is destroyed, a written contract can provide a prearranged path forward despite disagreement. It follows that design and construction contracts should be written hoping for the best, but planning for the worst. The following examples are illustrative.

Design Meetings. Design professionals promise to meet with the owner during the design and construction phases. This promise hardly needs to be written down if the project is progressing well, but problems can arise if the owner feels that proposed designs fail to meet its needs, the designer feels that the owner simply can’t make up its mind, and the meetings multiply. Who pays for the extra meetings? One possible answer is to define a certain number of meetings as “basic services” and pay for more meetings as “additional services” unless more meetings are needed to correct designs that were inconsistent with the owner’s written program, but the point is to think about and plan for this contingency before it occurs.

Schedule Submissions. The contractor is required to submit periodic schedule updates. The owner has a right to review and approve each updated schedule, and even has a right to withhold payment until an acceptable schedule is provided. However, the schedule may be subject to good faith disagreement, and many owners are reluctant to withhold payment simply because such a disagreement exists. But the owner needs a reliable schedule. What can the owner do, short of refusing payment, if the contractor fails to submit reasonable schedules? One approach is to refine the schedule requirement and impose a modest penalty for failing to meet that requirement (or pay a modest incentive for meeting the requirement). Again, the point is to plan for this contingency while the parties are still on good terms.

Claims. To pursue a claim for additional money or time, the contractor must give timely notice, clearly state the remedy sought, and submit backup documentation. This procedure does not need to be written down if the parties are working collaboratively, but it may work poorly if the parties are arguing about large amounts of time or money. A provision requiring the contractor to make a clear statement of claim (intended to prevent a change of theory later on) may have the perverse effect of eliciting only vague statements and reservations of rights because the contractor doesn’t want to be boxed in. But vague statements don’t lead to settlement, and the claims pile up. One approach (adopted in the current AIA documents) is to use an independent “Initial Decision Maker” to review disputes. This procedure is not uniformly successful, but at least it begins from a realistic recognition that a situation can arise where the parties need help to make constructive progress on pending claims.

Dispute Resolution. Design and construction agreements often provide that disputes will be addressed in an escalating fashion: discussions among field people, discussions among higher-level party representatives, mediation, and then either arbitration or a court proceeding. This is the sort of thing that experienced parties do even without a written contract. Surprisingly, some dispute resolution provisions prove ineffective if the parties actually have a serious dispute. What if one party refuses to meet, to participate in scheduling a mediation, or to help choose an arbitrator? One solution is to provide time limits (e.g., if the parties do not agree to a mediator within 30 days after the request for mediation is made, the mediation step can be skipped); another is to provide a backup method for choosing a mediator or arbitrator (organizations like the AAA have rules for this).

These are not detailed solutions, but they indicate how, by planning for the worst, parties can increase the chance of ultimate project success.

"Expect the Best, Prepare for the Worst" was originally published by the Daily Journal of Commerce" on March 18, 2016