The Contract: A Risk Management Tool

Deviation from Plans or Specification Disputes

Contracting is a risky business. Construction projects are high cost, complex team efforts that play out over an extended time period (often many years) with plenty of financial risk to go around. Because construction contracts are, for the most part, designed to protect owners and designers from contractors, lawyers have carefully crafted contracts to assign a lion’s share of the risk to the contractor. Usually on the contract face there are no problems (otherwise you wouldn’t have signed it) until there are problems, like when something goes wrong with work that is altered from plans and spec. The designer can then reject the work and refuse to pay under the terms of the contract you signed – Then you own it.

Contractual Risk – Deviation from plans or specification 

YOU OWN IT – unless you can demonstrate that you were directed to do it. 

When I was a contractor there were always open-ended clauses in my contracts that I preferred to neutralize where possible. These clauses stated in various ways that “the contractor has reviewed all of the plans specs, engineer’s reports and on and on, to determine any conflicts; or agrees that there are no conflicts. The clauses in question attempt to say that the contractor is to review and become responsible and liable for conflicts in plans and specifications they did not prepare.

Mitigation Step #1. – The Reasonableness Test

After contract signing and before work commenced, I would send a letter to the designer and owner that would say something like the following: “I have reviewed all the plans, specs, reports, etc. (whatever the contract said) that you provided to us prior to contract signing, and was unable to discover any conflicts; or to our knowledge, there are no conflicts. Please review your plans, specs, etc., and advise if there are any conflicts at this time or if any become known to you. I look forward to working with you on this project.”

The point is, if the professional and licensed designer can’t find the conflict, how can the contractor be expected to find it? It simply moves the dial as to who is responsible/liable. The idea is to demonstrate that you complied with the contract by reviewing and finding nothing and then turned to the more qualified licensed designer for verifications which they should provide under the sections on “requests for information”. The contractor has a “reasonable” right to believe the designer’s review is reliable. The law often relies on “reasonableness” as a standard. Is it reasonable for the designer to require impossible compliance or is it more reasonable to rely on the designer’s expertise than the contractor’s? This suggests the unreasonableness of trying to say, “if you don’t find it, it’s your liability”. This may become a win in court, but only if you demonstrate that you tried and complied and then shifted the question back to the designer.

Mitigation Step #2. – Written Documentation

All of my PMs were trained to confirm every instruction or direction in writing or in meeting minutes. Important issues would always end with: “If we don’t hear from you to the contrary, we will proceed”. Or we might say: “We will proceed unless instructed otherwise.” Many owners and designers thought (some complained) that these memoranda were unnecessary, but I would politely refer to the clause(s) in the contract that stated, “the contractor will not deviate from the contract, plans or specs without written instruction from the designer or owner”.

Mitigation Step #3. – Assign Responsibility

We are not designers and should NEVER become responsible for the design. If after making a suggestion to the designer to do a portion of the work or a detail differently (solicited or unsolicited) and the designer says to proceed with it, it is the designer’s direction to alter the design. (Those who do not know the law often have it rammed down their throat.) I always documented these exchanges in an attempt to place certain risks where they belonged. 

Conclusion

The construction contract as an inert document can appear benign until things go wrong, and disputes arise. Suddenly it becomes a living document that has to be managed every step of the way. If you spend your effort negotiating your contracts and then stick them in the desk drawer as the work commences, you are putting your firm at risk. As long as the project is in progress, the contract is alive, and each of your employees should have an active role in seeing that you comply with the terms of your contract and that the owners and designers do as well. 

Next week we will retune to our Best in Class Management series.

Read More:  Simplar and Contracts