10 Chap 10 - Holland & Hart · · 2017-01-15§ 10.2.2—No-Damages-For-Delay Generally, a...

Chapter 10

THE CONTRACTOR

Stephen A. Hess, Esq., Editor and Author (2005 & 2007 Supplements)

Sparks Willson Borges Brandt & Johnson, P.C.

Robert E. Benson, Esq., Editor (2003 Supplement)

Holland & Hart LLP

Janet Lawler McDaniel, Esq., Editor and Author (1999)

Faegre & Benson

SYNOPSIS

§ 10.1 INTRODUCTION

§ 10.2 THE CONTRACT

§ 10.2.1—Substantial Completion

§ 10.2.2—No-Damages-For-Delay

§ 10.2.3—Liquidated Damages

§ 10.2.4—Consequential Damages

§ 10.2.5—Indemnification

§ 10.2.6—Warranties/Guarantees

§ 10.2.7—Differing Site Conditions

§ 10.2.8—Changes

§ 10.2.9—Termination Provisions

§ 10.2.10—Pay-When-Paid And Pay-If-Paid Clauses

§ 10.2.11—Standard Of Care

(10/07) 10-1

Author’s Note: The American Institute of Architects released the next generation of

AIA-101 and AIA-201 contracts in November 2007. Because the 1997 forms will remain in

use for some time, we have elected to continue to include references to the 1997 forms. Read-

ers should be careful to review the new forms to determine whether they have been changed in

important respects from the provisions cited below.

In addition, on September 28, 2007, a coalition of construction industry organizations

released a set of more than 70 model contract documents under the name “ConsensusDOCS.”

These new form agreements are beyond the scope of this Chapter, but readers can learn more

at www.consensusdocs.org

§ 10.2.12—Other Important Contract Provisions

§ 10.2.13—General Comments

§ 10.2.14—Limitation Of Rights Under CDARA

§ 10.3 THE DESIGN-BUILD CONTRACT

§ 10.3.1—Shift Of Design-Related Risk To Contractor

§ 10.3.2—Insurance For Managing Design Risks

§ 10.3.3—Bonds For Design-Build Projects

§ 10.4 STATUTORY RIGHTS, DUTIES, AND RESPONSIBILITIES

§ 10.4.1—Trust Fund Statute

§ 10.4.2—Premises Liability Statute

§ 10.4.3—Workers’ Compensation Act

§ 10.4.4—Occupational Safety And Health Act

§ 10.5 BIBLIOGRAPHY

EXHIBIT

Exhibit 10A—Drafting Considerations For Contractors

This Chapter discusses the contractor’s role in the construction process, common contract

provisions from the contractor’s perspective, the duties and responsibilities commonly assigned to

the contractor, the potential risks to the contractor from various aspects of the construction

process, various contractual and statutory provisions for managing these risks from the contrac-

tor’s perspective, and potential claims which a contractor might defend or assert against other

project participants and third parties. This Chapter is written from the prime contractor’s perspec-

tive of both its relationship with the owner and its relationship with the subcontractor.

The two main types of contracts which a contractor most frequently encounters are the

prime contract, between the owner and the contractor, and the subcontract, between the contractor

and its subcontractors, who are performing part or all of the work on the project. There are certain

key provisions in these contracts that can dramatically affect the contractor’s profit or fee on a

project, even though the provisions often do not directly relate to the definition of the contract

sum or the cost of the work. Most of these provisions apply equally to the prime contract and the

§ 10.2 • THE CONTRACT

§ 10.1 • INTRODUCTION

§ 10.1 The Practitioner’s Guide to Colorado Construction Law

10-2 (10/07)

subcontracts, although the contractor will generally be on the opposite side of the fence depending

upon which of the two types of contracts it is negotiating. Following are clauses which the con-

tractor should particularly consider whether to include in its contracts and, if so, the specific lan-

guage to use.1

§ 10.2.1—Substantial Completion

“Substantial completion” generally determines the point at which delay damages may

commence, liquidated damages end (or are reduced substantially), retention must be released, the

owner becomes responsible for insuring the project and for utilities for the project, warranty peri-

ods start, the limitation period for making claims on bonds begins, and the limitation period dur-

ing which the contractor may have legal liability for claims relating to the project begins.2 This is,

therefore, a key provision in the general contract, and careful attention should be paid to the defi-

nition of substantial completion and any provisions that may impact upon that definition.

Under Colorado law, in the absence of a statute or contract provision defining substantial

completion, substantial completion is generally deemed to have occurred at the point that the only

deviations from final completion do not materially interfere with use of the premises, and can be

conveniently remedied.3 Thus, where all the essential elements of the work have been completed

and only “trivial imperfections” remain, the project will be considered substantially complete.4

Upon substantial completion, the contractor is entitled to payment of the contract price, less any

deductions, including deductions for the work to be remedied.5

With respect to public contracts for construction, C.R.S. § 24-91-102(5) defines substan-

tial completion as “the date when the construction is sufficiently complete, in accordance with the

contract documents, as modified by any change orders agreed to by the parties, so that the work

or designated portion thereof is available for use by the owner.” Although article 24 deals with

retention of funds on public contracts, the definition should also be applicable for purposes of

commencement of warranty periods and statutes of limitations.

The 1997 version of American Institute of Architects (AIA) Document A-201, General

Conditions of the Contract for Construction, has revised the definition of substantial completion in

a manner that is beneficial to the contractor. (See Appendix A.) Previously, the architect could

require the contractor to correct any item not in accordance with the contract documents before

issuing a certificate of substantial completion. Now, the contractor is only required to correct or

complete items that are not sufficiently complete so that the owner can occupy or utilize the work

or the designated portion for its intended use.6 Although contractual definitions of substantial

completion cannot change the statutory meaning of the term, the contractual definition will govern

those events that are not controlled by statute.

Owners frequently propose contracts that define substantial completion in a manner

requiring a final certificate of occupancy, or completing all punchlist work, thereby potentially

delaying final payment and commencement of warranty periods. Such contract provisions should

be avoided, as they give the owner the ability to make it very difficult, if not impossible, for the

contractor to attain substantial completion, even though the owner may be able to beneficially

occupy the project.7

The Contractor § 10.2.1

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§ 10.2.2—No-Damages-For-Delay

Generally, a contractor is entitled to recover damages for delays in the progress of the

work if such delays were caused by the owner, whereas only time extensions are available if the

delay is caused by neither party (e.g., unanticipatable weather conditions, acts of God). However,

if the prime contract contains a no-damages-for-delay provision, the contractor can only receive a

time extension for delays, even if the owner causes those delays.

Such clauses are invalid with respect to any public projects constructed by the State of

Colorado or a political subdivision, although public works contracts can prohibit the contractor

from recovering damages for delays caused by the contractor or its agents.8 On private projects,

no-damages-for-delay provisions are enforceable absent fraud, bad faith, coercion, or other

inequitable contract by the owner.9 Other states have found an additional exception to enforceabil-

ity of the provision, where the delay is found to be beyond the contemplation of the parties at the

time of contracting.10 Colorado has not yet considered this exception in reported decisions.11 See§§ 11.9.1, 17.5.2 through 17.5.4, and 20.2.1.

In light of the absence of controlling Colorado authority, contractors faced with a poten-

tial limitation of damages under a no-damages-for-delay clause should consider numerous judicial

exceptions adopted in other jurisdictions.12

§ 10.2.3—Liquidated Damages

Liquidated damages constitute a fixed amount of damages set by contract to quantify

compensation due the owner for unexcused contract delays and they are used frequently in con-

struction contracts. A liquidated damages provision in an owner contract is generally intended to

preclude the owner from recovering any other types of damages for delay.13

In order to be enforceable, a liquidated damage clause must satisfy three conditions:

1) at the time the contract was entered into, the anticipated damages in case of breach

were difficult to ascertain;

2) the parties mutually intended to liquidate them in advance; and

3) the amount of liquidated damages, when viewed as of the time the contract was made,

was a reasonable estimate of the potential actual damages the breach would cause.14

There is some authority to the effect that if the amount of liquidated damages is dispropor-

tionately in excess of the actual damages incurred, the liquidated damages provision is void.15 In

addition, there is no legal requirement that a liquidated damages clause specify a dollar amount.

Instead, liquidated damages may be tied to any readily ascertainable standard.16 Liquidated dam-

ages clauses are enforceable in public construction contracts if the amount is “reasonable.”17

However, liquidated damages will not be awarded in favor of a party who was at fault, in whole or

in part, in causing the delay.18

It is important that the contract state that liquidated damages are in lieu of any other dam-

ages for the contractor’s delay, including actual, incidental, and consequential damages. Since liq-

uidated damages usually stop accruing upon substantial completion,19 the contractor should

§ 10.2.2 The Practitioner’s Guide to Colorado Construction Law

10-4 (10/07)

ensure that there is an acceptable contract definition for substantial completion.20 In addition, the

contract should provide that time extensions will be granted (thereby extending the date of sub-

stantial completion) for everything that is beyond the contractor’s control, including delays caused

by the owner and its agents, adverse weather, fires, accidents, strikes and other labor unrest,

unforeseen site conditions, and changes to the contract. The 1997 version of AIA A-201 permits

time extensions for delays in the commencement of the work, as well as delays in the progress of

the work, and this is an important provision to include in all owner contracts.21 See § 26.3.4.

§ 10.2.4—Consequential Damages

“Consequential damages” are damages that result from the breach, but do not normally

result in the ordinary course from the breach.22 These damages must be foreseeable at the time of

contracting, and generally include economic loss incurred as an indirect consequence of the

breach, such as lost profits and diminution in value.23

Under the Colorado Uniform Commercial Code (UCC), consequential damages in the

context of a sale of goods are defined as “[a]ny loss resulting from general or particular require-

ments and needs of which the seller at the time of contracting had reason to know and which

could not reasonably be prevented. . . .”24 The Colorado Supreme Court has held that the UCC

applies to construction contracts if the predominate purpose of the transaction is a sale, with labor

incidentally involved, as opposed to the situation where the primary purpose is the rendition of

services, with goods incidentally involved.25

Article 4.3.10 of the 1997 version of AIA A-201 provides that both parties waive conse-

quential damages, and gives examples of the types of damages included in such waiver. (SeeAppendix A.) For example, the owner’s waiver includes rental expenses, losses of use, income,

profit, financing, business and reputation, and loss of management or employee productivity or of

the services of such persons. The contractor’s waiver includes principal office expenses (such as

the compensation of personnel stationed there); losses of financing, business, and reputation; and

loss of profit other than anticipated profits arising directly from the work.

The contractor should be aware that there are circumstances in which the owner may

recover consequential damages even if the contract prohibits such damages. For example, in

Cooley v. Bighorn Harvestore Systems, the court held that if the contract provides for a specific

limited remedy and that remedy is deemed insufficient to meet its essential purpose, recovery of

consequential damages will be permitted.26 It appears that the court might not have awarded con-

sequential damages if the contract had stated that consequential damages could not be recovered

even if the specified remedy failed of its essential purpose.27 See § 26.3.3.

§ 10.2.5—Indemnification

“Contractual indemnity” is used to allocate the risk of damages among the various parties

involved in the project, generally without examining which party’s negligence actually caused the

conduct. When one party agrees to “indemnify” the other against claims or damages arising out of

performance of the work, that means the first party will pay any judgments or losses incurred by

the second party, even if the second party was responsible for the claims or damages.28


(10/07) 10-5

In public contracts for the construction, alteration, repair, or maintenance of any building,

structure, or other works dealing with construction, a provision requiring one party to indemnify

the other for the latter’s own negligence is void.29 In addition, in 2007 the Colorado legislature

passed SB 07-087,30 rendering invalid any indemnification agreement in a private contract that

purports to allow the indemnitee to be protected against its own sole negligence.31 However,

Colorado courts do not view even permissible provisions with favor, and require fairly explicit

language evidencing the parties’ intent to provide for indemnification.

To the extent such clauses survive SB 07-087, the Colorado Supreme Court has held that

“indemnity contracts holding indemnitees harmless for their own negligent acts must contain clear

and unequivocal language to that effect.”32 In a recent case, however, the court seemed to relax

this requirement. In Public Service Co. of Colo. v. United Cable of Jeffco, Inc., the indemnity pro-

vision at issue did not specifically mention the negligence of the indemnitee, but covered “all

claims, liabilities, causes of action, or other legal proceedings . . . in any way arising out of, con-

nected with or resulting from” the indemnitor’s conduct.33 The court confirmed that indemnity

agreements that purport to indemnify for the negligent conduct of an indemnitee must be strictly

construed. However, the court held that the quoted language evidenced the parties’ intent that the

indemnitee be indemnified against its own negligence. Again, this law is important only to the

extent that a clause at issue is not rendered void under SB 07-087.

A contractor would thus be well advised to ensure that the contractual indemnity specifi-

cally state that the contractor is not required to indemnify the owner for the owner’s or its agents’

own negligence. In contrast, the contractor should consider using the indemnity provision in

Public Service Co. of Colo. in its subcontracts, thereby requiring the subcontractor to indemnify

the contractor for the contractor’s own negligence, and obviating the need to litigate whose negli-

gence gave rise to the claim at issue.

Article 3.18 of AIA A-201 (1997) contains an indemnification provision that is reasonably

fair to both parties, and the key elements should therefore be considered for inclusion in the prime

contract. (See Appendix A.) The provision only requires the contractor to indemnify the owner,

architect, architect’s consultants, and agents and employees of any of them (does not cover con-

struction lender, prime tenants, or others), and only applies to claims arising out of the work of the

contractor or its subcontractors (not the owner or its separate contractors). Indemnity applies only

where the contractor or its subcontractors have been negligent (a breach of contract is not enough

to activate this provision), and the contractor will only be liable for that portion of the damages

caused by the contractor or the other indemnitors. Finally, the provision does not require indemni-

fication where the claims arise from the architect’s or engineer’s design errors, nor does it apply

to damage or injury caused by the architect’s or engineer’s instructions if those instructions were

the primary cause of the damage.34 See §§ 26.3.11 and 26.3.12.

§ 10.2.6—Warranties/Guarantees

Under these provisions, the contractor or subcontractor generally warrants or guarantees

that the work is performed in a workmanlike manner in accordance with the plans and specifica-

tions, and that it will be free from defects. AIA A-201 (1997), article 3.5, is probably the most


10-6 (10/07)

common warranty provision found in both prime contracts and subcontracts. It contains the fol-

lowing important features: (1) it excludes any defects which are “inherent in the quality required

or permitted”; and (2) it excludes damages or defects caused by abuse, modifications not per-

formed by the contractor, improper or insufficient maintenance, improper operations, and normal

wear and tear. (See Appendix A.)

It is a common belief that the warranty under article 3.5 is limited to one year, but in fact

there is no time limit specified in article 3.5. Instead, the one-year limit applies to the owner’s

right to require the contractor to correct any defects under article 12.2.2. (See Appendix A.) Thus,

both within and beyond the one-year period, the owner can sue for damages for defects, subject

only to applicable statutes of limitation.

With respect to the one-year limit on correcting latent defects, the contractor should

ensure that the time period commences to run on substantial completion, not final completion or

the first appearance of the defect. In addition, the contract should provide that the correction peri-

od is not extended by the performance of any corrective work.

The prime contract should define “defects” no more broadly than a failure to conform

with the contract documents. In addition, the contractor should be cognizant of subcontractors’

and suppliers’ efforts to limit damages for breaches of express or implied warranties, so that the

contractor does not provide the owner with warranties that are broader than what was received

from the subcontractors or suppliers.

The parties to a construction contract may include a provision disclaiming any express

and/or implied warranties. In order to be enforceable, such disclaimers must be clear and unam-

biguous, and the disclaimers will be strictly construed.35 An implied warranty will also be exclud-

ed to the extent that an express warranty in the contract addresses the same subject matter as the

implied warranty.36 See Chapter 16, “Express and Implied Warranties in Construction Law” and

§ 26.2.12.

§ 10.2.7—Differing Site Conditions

Differing site conditions are generally defined as site conditions that are different from

those indicated in the contract or from those ordinarily encountered and generally recognized in

the work provided for in the contract.37 Virtually all standard contracts contain a differing site

condition clause, which allows the contractor a price and time adjustment for differing site condi-

tions. Absent such a provision, the contractor assumes all risks for differing site conditions.38

Public contracts must include a differing site conditions clause, unless the contract is negotiated or

the contractor provides the site or design.39

If the owner includes the results of test borings and soils reports in the bid materials, the

owner is generally held responsible for the accuracy of that information.40 However, where the

prime contract contained a provision disclaiming any liability for inaccuracies contained in test

borings submitted to prospective bidders, and specifically stated that the soils report was included

only for information, a federal district court in Colorado has held that the representations in the


(10/07) 10-7

soil reports did not constitute an implied warranty as to the accuracy of the report.41 The contrac-

tor would thus be well served to try to eliminate or restrict site condition disclaimers or, alterna-

tively, to include a contingency in its bid to cover the risk.

Owners will try to use broad exculpatory clauses to reduce or eliminate the number and

types of conditions that will fall within the differing site condition clause, thus placing the risk for

such conditions on the contractor. Many courts hold that these disclaimers of the accuracy of site

condition representations by the owner are not effective to prevent the contractor from obtaining a

change under the differing site condition clause. However, the contractor is well served to try to

eliminate or restrict site condition disclaimers and, if not able to do so, to include a contingency in

its bid to cover the risk.

§ 10.2.8—Changes

Provisions in the prime contract or subcontract dealing with changes generally set forth

the type of changes permitted (e.g., whether the owner can require the contractor to proceed with

changed work without an agreement on price adjustments and time extensions), and the parties’

responsibilities in the event of a dispute concerning compensation for changes. C.R.S. § 24-106-

101 governs procedures for price adjustments for changed work on public contracts.

In Colorado, a contract provision requiring that any change orders be in writing is valid.42

However, courts will consider whether there has been a waiver of the contractual requirement,

either express or implied. For example, where the contractor made statements to a subcontractor

that the contractor considered exterior painting to be an “extra” and he would seek additional

compensation for the painter from the architect, the court found that the contractor waived the

contract requirement that all extras be in writing.43 See §§ 6.2.7, 7.2.4, 10.2.7, 10.2.8, 11.9.3,

11.9.4, 11.14.9, 12.5.6, 17.4.4, 18.13.5, and 20.2.3.

§ 10.2.9—Termination Provisions

Prime contracts generally include provisions setting forth the conditions under which the

owner or the contractor may terminate the contract. In the absence of such provisions, common

law specifically allows the contractor to stop work and to recover damages for breach of contract

if progress payments are not timely made.44 In addition, either party can terminate the contract

upon a “material breach” of the contract, although it is likely that the terminating party will not

know at the time of termination that the other party’s breach will, in fact, be deemed material.45

Contract provisions dealing with termination are designed to avoid that uncertainty, by specifical-

ly defining circumstances that constitute material breach, and thereby grounds for termination.

The contractor should ensure that the prime contract contains a provision allowing the

contractor to terminate the contract in the event of non-payment by the owner, and suspension of

the work for a specified period of time for non-payment. It would also be advantageous to have

the right to suspend work during the period of any uncured material breach by the owner. Alterna-

tively, the contractor should attempt to negotiate a provision similar to AIA A-201 (1997), § 14.1.

(See Appendix A.) This section allows the contractor to terminate the contract upon “repeated sus-

pensions, delays or interruptions of the entire Work by the Owner” for a specified number of days,


10-8 (10/07)

or if the work has been stopped for 60 consecutive days because the owner has “persistently failed

to fulfill the Owner’s obligations under the Contract Documents with respect to matters important

to the progress of the Work.” Ideally, this provision would be modified to define “repeated” and

“persistently,” and to shorten the requisite time periods.

Given the dramatic impact of termination, a contractor should ensure that the owner is

permitted to terminate the contract for cause only if the contractor refuses to supply enough

skilled workers or proper materials after two written opportunities to cure, or fails to cure a sub-

stantial breach of a contract provision which is essential for proper performance of the work.46

The provision should also provide for payment to the contractor of any excess of the balance of

the contract price over the cost to complete.

Often, the owner will insist on a provision permitting the owner to suspend and terminate

the work for the convenience of the owner. With respect to suspension of the work, the contractor

should negotiate a limit on the amount of time the work can be suspended, thereby allowing the

contractor to terminate the contract if the suspension exceeds that time limit. In addition, the pro-

vision should specifically allow for recovery of the contractor’s de-mobilization and re-mobiliza-

tion costs.47

In the event of a termination for convenience by the owner, the contractor should be enti-

tled to recover the following costs: demobilization costs; relocation costs for employees that must

be transferred; layoff and severance costs for employees that cannot be transferred; administrative

and legal costs relating to the termination; mobilization, set-up, and learning-curve productivity

costs unrecovered from the owner to the date of termination; losses on the disposal of equipment

and inventories; costs incurred in connection with the termination of subcontracts and purchase

orders; and reasonable overhead and profit on the work not executed. AIA A-201 (1997), § 14.4.3,

does provide for recovery of reasonable overhead and profit on the work not executed, but is not

sufficiently detailed to prevent disputes over termination costs, as it provides only for recovery of

“costs incurred by reason of such termination.” (See Appendix A.) Both the contractor and the

owner would be well-served to have a detailed itemization of the termination costs that are recov-

erable by the contractor. See §§ 11.14.1, 11.14.11, 18.2.2, and 20.2.1.

§ 10.2.10—Pay-When-Paid And Pay-If-Paid Clauses

Absent a contrary provision in the contract, the owner’s failure to pay the contractor does

not relieve the contractor from its obligation to pay its subcontractor.48 Accordingly, many con-

tracts contain provisions that attempt to condition a subcontractor’s right to receive payment on

the contractor’s receipt of payment from an owner, or at least to tie the timing of any required

payment on the contractor’s actual receipt of payment.

A common dispute between contractors and subcontractors is the extent to which such a

provision will be construed as allowing a contractor to avoid any payment obligation to the sub-

contractor completely if the owner fails to pay the contractor. Because courts generally disfavor

such a clause, a court will interpret such a clause when it can as creating only a “pay-when-paid”

obligation under which the contractor must pay the subcontractor when the contractor receives


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payment or, if no payment is made by the owner, a reasonable time after the subcontractor per-

forms its work. An enforceable “pay-if-paid” clause, on the other hand, conditions the subcontrac-

tors right to receive payment on the contractor’s receipt of payment, and if the contractor never

receives payment from the owner, its obligation to pay the subcontractor never arises.

Pay-if-paid clauses are enforceable in Colorado, but the contract language must be clear

that payment by the owner is a condition precedent to the contractor’s obligation to pay the sub-

contractor. The leading Colorado case on the construction of these clauses is Main Elec., Ltd. v.Printz Services Corp.49 In that case, the subcontract provided that the contractor would make pay-

ment to the subcontractor “provided like payment shall have been made by Owner to Contractor.”

The trial court held that the subcontract language was not sufficiently clear to make payment by

the owner a condition precedent to the contractor’s obligation to pay the subcontractor. The appel-

late court reversed and held that it was a condition precedent, such that the contractor was not

obligated to pay the subcontractor because the contractor had not received full payment from the

owner. This ruling effectively transformed the “pay-when-paid” clause into a “pay-if-paid” clause,

placing the risk of the owner’s nonpayment squarely on the subcontractor.

The Colorado Supreme Court reversed, holding that the payment clause constituted a

pay-when-paid clause, as the language was insufficient to constitute a condition precedent shift-

ing the risk of the owner’s nonpayment from the general contractor to the subcontractor. The

court found that in order to “create a pay-if-paid clause in a construction contract, the relevant

contract terms must unequivocally state that the subcontractor will be paid only if the general

contractor is first paid by the owner and set forth the fact the subcontractor bears the risk of the

owner’s nonpayment.”50

In light of the Main Electric decision, a contractor who intends to include a pay-if-paid

clause in its subcontract should include specific language to the effect that payment by the owner

to the contractor is a “condition precedent” to the contractor’s obligation to pay the subcontractor,

and that the contractor is relieved of any obligation to pay the subcontractor if the owner does not

pay the contractor. The clause should further state that the parties understand and agree that the

subcontractor, not the general contractor, bears the risk of the owner’s nonpayment.51 If the pay-

ment provisions of the subcontract do not include this language, the clause will be deemed a “pay-

when-paid” clause. This will allow the contractor to delay payment to the subcontractor a reason-

able period of time if payment has not been made by the owner, but ultimately requires the con-

tractor to make full payment to the subcontractor regardless of whether the owner ever pays the

contractor. See §§ 4.13.2, 11.5.1, 11.12.1, 11.14.6, 17.4.2, and 18.5.1.

§ 10.2.11—Standard Of Care

Recent decisions by the Colorado Supreme Court concerning the “economic loss rule”

counsel contractors to limit their liability by including in their agreements specific provisions

detailing their standards of care.

In 2000, the Colorado Supreme Court issued two seminal opinions adopting and formu-

lating the economic loss rule for application in Colorado. Those cases, Town of Alma v. AzcoConstr., Inc.,52 and Grynberg v. Agri Tech, Inc.,53 held that a plaintiff is barred from recovering in


10-10 (10/07)

tort for breach of a contractual duty when the loss is puely economic and the alleged tortfeasor

does not bear a separate duty — that is, a duty independent from the contract — to the plaintiff.

Although Town of Alma and Grynberg articulated some of the considerations in assessing

the existence of an “independent duty,” the cases left a number of questions open in the arena of

construction law, including the question of the extent to which an engineer under contract with an

owner bears an independent tort duty not to cause foreseeable economic losses to a subcontractor

working on the owner’s property. In BRW, Inc. v. Dufficy & Sons, Inc.,54 the supreme court reject-

ed the court of appeals’ reasoning that an engineer bears traditional tort duties limited only by the

foreseeability of the claimant’s harm. Rather, the supreme court constrained the engineer’s duty

by the limitations of the contract that the engineer executed with the owner. In cases in which the

engineer’s duties are defined by the contract, the court held, the engineer bears no independent

duty of care to the subcontractors working on the owner’s project. Because the engineer bears no

independent duty of care to subcontractors, they cannot sue the engineer for negligence but

instead must rely on their own contract remedies.

The importance of these decisions lies largely in the fact that the purpose of the economic

loss rule is to respect the parties’ freedom to contact, and to ensure that the common law of torts

does not supplant the parties’ expectations concerning their respective liabilities and standards of

care. BRW made it clear that such contract provisions can have practical implications well beyond

the immediate parties to the contract in limiting a party’s exposure to negligence claims.

§ 10.2.12—Other Important Contract Provisions

There are a number of other contractual provisions that the contractor should take care to

review, all of which are dealt with in detail in other chapters of this book. Claims provisions are

of obvious importance, particularly as to the specified period for giving written notice of claims

for delay, acceleration, disruption, and interference. It is most important that the contractor ensure

it is not required to give written notice until it has actual knowledge of the existence of a claim.55

Contract clauses providing for some form of alternative dispute resolution should be care-

fully considered, particularly with regard to the specified locale for the ADR proceeding.56 Choice

of law provisions, which are generally enforced, may have a significant impact on the outcome of

any disputes.57 Insurance and bonding requirements should also be reviewed, especially to deter-

mine that the contractor is adequately protected for any default in the subcontractors’ work.58

§ 10.2.13—General Comments

It is critical that the contractor has a detailed understanding of the impact of the provi-

sions contained in the prime contract and the subcontracts relating to each project. Perhaps even

more important, the contractor must ensure that the project management has a firm grasp of the

key contract provisions, and understand how to protect the contractor’s position in the enforce-

ment of those provisions. All too often, the contractor has gone to great lengths to negotiate satis-

factory contracts with the owner and the subcontractors, only to have the contractor’s project

management fail to follow the contractual requirements to obtain the full benefits of the contract

provisions.


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The law implies a promise upon the contractor not to prevent, hinder, or delay the per-

formance of a subcontractor.59 If the contractor breaches that implied promise, the subcontractor

may be entitlted to either rescind the subcontract, seek damages on the basis of quantum meruit,

or complete the contract and sue for the reasonable value of labor and material expended in com-

pleting the contract.60

§ 10.2.14—Limitation Of Rights Under CDARA

HB 07-1338,61 which was signed into law in 2007, prohibits parties from contracting to

eliminate or to limit any of the rights, remedies, or damages provided for in the Construction

Defect Action Reform Act (CDARA) or in the Colorado Consumer Protection Act (CCPA). The

new law applies only to residential property. Additional information concerning this law may be

found in Chapter 14, “Residential Construction.”

The design-build (D/B) form of project delivery system is being used more frequently in

every sector of the construction industry, including design-build contracts between the contractor

and the owner, as well as design-build subcontractors for specific items of work on a project.62

Under the traditional form of project delivery system, the owner bears the responsibility to pro-

vide the project design, with the architects/engineers (A/Es) working directly for the owner as the

owner’s agents. When the contractor provides a design-build form of project delivery, the contrac-

tor takes on design liability for a project, in addition to construction liability, thereby substantially

increasing its risk on the project.

§ 10.3.1—Shift Of Design-Related Risk To Contractor

Under the design-build form of project delivery, the D/B contractor provides a single

source of responsibility to the owner for project design and construction.63 Regardless of whether

design services are provided by an in-house design staff, joint venture partners, or subcontracted

A/Es, the D/B entity cannot divorce itself from design responsibility and the related exposure to

professional liability.

In fact, a D/B contractor’s legal obligation for the design often exceeds that of the A/Es

who provide design services to the project. D/B contractors generally become responsible for the

accuracy and completeness of project plans, specifications, and cost estimates. Should there be any

deficiencies in design performance, the associated contractual, tort, and statutory liability will fall

upon the D/B entity. Allegations and claims for negligence related to design preparation, site sur-

veys, material selection, increased construction costs, and construction observation are common.

Under the design-build contract, the contractor becomes liable for such design related claims.

See Chapter 26, “Contract Clauses Managing, Allocating, and Transferring Construction Risks.”

§ 10.3 • THE DESIGN-BUILD CONTRACT


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Implied Warranty of Accuracy of Plans and Specifications

In traditional design-build project delivery, A/Es generally do not warranty their design

services by guaranteeing perfect results. Instead, the law simply requires an A/E to perform in a

manner consistent with generally accepted standards of care and skill for that profession.64

However, an owner is traditionally held to a different standard when providing those same

plans to a contractor. Unlike the design professional, the owner’s design-defect risk implies a war-

ranty of adequacy and suitablity for construction.65 As a result, the owner of a traditional design-

bid-build project may be liable to the contractor for design defects, while not necessarily having

recourse against the A/E who performed those services in a manner consistent with generally

accepted standards of care. For example, a geotechnical engineer may conduct subsurface investi-

gations according to generally accepted standards of care and skill, and not uncover specific sub-

surface or environmental conditions. In traditional project delivery, only the owner would be

responsible for the additional costs associated with these changed conditions. However, under the

design-build method of project delivery, this additional cost may have to be absorbed by the D/B

contractor (unless, of course, the owner hires the geotechnical engineer directly).

In design-build project delivery, design defect risk may be assumed by the contractor

responsible for delivering an “end product.” To a degree, this shift in design-defect risk is funda-

mental to the “single point of responsibility” concept of design-build project delivery. However,

this shift should occur in a fair and reasonable fashion. D/B contractors must be particularly care-

ful not to imply or express warranties or guarantees that may be in excess of “generally accepted

standards of care.” Contract language such as the “highest standard of care” should be avoided

when referring to code conformance, construction costs, or performance. The D/B contractor must

understand the design-defect risk being assumed and manage this risk responsibly.

Legal counsel should carefully review all contract language relating to risk allocation,

change orders, differing site conditions, concealed conditions, rights-of-way, and utility relocation.

The additional exposures which D/B contractors can assume include implied or express war-

ranties, efficiency guarantees, and long-term maintenance responsibilities. D/B contractors should

also anticipate the possibility that design issues could directly affect the collection of construction

progress payments for work performed. In addition, design-related delays could lead to liquidated

damages assessments, increased interest expense, and an escalation of subcontractor and material

prices. Ultimately, D/B contractors may need to have the financial strength to absorb whatever

risk they cannot insure.

§ 10.3.2—Insurance For Managing Design Risks

Commercial general liability (CGL) and umbrella/excess policies specifically exclude

coverage for claims arising out of professional services including engineering, architectural, and

surveying services. As a result, D/Bs must rely on errors and omissions (E&O) policies specifical-

ly designed to protect the insured against liability arising from negligence, errors, and omissions

in rendering those professional services. Unfortunately, these policies have severe limitations.


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Design deficiencies are often latent, and losses can occur or be discovered many years

after project completion. The insurance industry commonly refers to these types of potential loss-

es as “long-tail liabilities.” In fact, only 85 percent of the total claims on E&O policies are report-

ed within five years of project completion. On average, 15 percent are reported more than five

years after project completion, and 2 percent are reported more than 10 years after project com-

pletion. As a significant loss exposure with long-tail liability, insurers are generally providing

effective professional liability coverage on a “claims-made” basis. This means that the policy will

cover only insured losses that are claimed during the policy period or during the “extended report-

ing period” (tail) purchased for the policy. Claims made after the policy expires are not covered,

even if the loss occurred during the policy period. Coverage can be obtained on either an annual

basis or a project-specific basis. Annual (practice) policies have one-year policy periods and pro-

vide coverage for all projects of an insured under a single aggregate limit. These policies must be

renewed annually. Alternatively, project-specific policies provide coverage dedicated to a specific

project and have a policy period equivalent to the life of that particular project. Extended-report-

ing periods can be purchased for both types of policies. See Chapter 6, “Insurance for the

Construction Project.”

Primary E&O Coverage vs. Subcontractor Indemnification

D/Bs are often inclined to rely heavily upon indemnification from independent A/Es pro-

viding professional services to their projects. The protection an A/E’s E&O policy provides is

often overestimated. As a result, D/Bs frequently choose to forego primary E&O coverage, or

they choose to obtain only “catastrophic” coverage with a sizable “self-insured risk” satisfied by

the A/E’s practice policy. Although subcontractor indemnification is always recommended, D/Bs

are also advised to maintain primary coverage under their own E&O policy.

An A/E’s E&O policy will cover only that contractual liability which would exist in the

absence of the indemnification agreement, i.e., the negligence-based liability of an A/E.

Unfortunately, the legal responsibility of the design-build entity may exceed that of any provider

of design services. D/Bs can assume additional professional liability for negligent design activity,

negligent supervision of design, negligent supervision of construction, and implied warranties.

D/Bs may also be held to a higher “standard of care” than the generally accepted standard of care

required of A/Es. As a result, a D/B may be subject to professional liability claims that would

never trigger coverage under the A/E’s policy.

For instance, an A/E’s E&O carrier may deny coverage for professional liability claims

when a D/B does preliminary design work, with or without in-house professionals, before subcon-

tracting with the A/E. The courts have found that without early inclusion of the A/Es in the pre-

bid design phase, they cannot be responsible for that design work. In fact, claims may be denied

on the sole basis that the D/B has in-house architects/engineers. Although they may not be stamp-

ing plans, courts have found that these professionals are knowledgeable and should have known

better. Primary coverage under a project-specific E&O policy is at the core of any responsible

design risk management program for D/Bs.


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There are three more reasons why a D/B should not rely completely on an A/E’s E&O pol-

icy. First, an A/E’s E&O carrier generally will not afford a defense to the D/B, even though that

insurer may ultimately indemnify the D/B for losses due to the A/E’s negligence. Second, a D/B

cannot be sure the A/E firm will outlive the design exposures. Third, A/Es generally maintain prac-

tice policies to cover all risks and claims made during a policy period. Without dedicated coverage

under a project-specific policy, a D/B cannot be reasonably assured either that the coverage will be

renewed annually or that the limits will not be exhausted by claims on unrelated projects. Also,

some A/E policies have a standard exclusion for claims relating to design-build projects. Such poli-

cies would require a special modification to maintain coverage for the design-build project.

D/Bs should secure “first dollar” E&O coverage with reasonable limits, deductibles, or

self-insured risk. Because professional liability is excluded under most excess liability policies, the

policy limit should be adequate, on its own, relative to the professional exposure to consequential

damages on the project. Alternatively, lower limits can be augmented by excess E&O coverage.

Normal deductibles for a primary E&O policy are approximately 0.1 percent of the total construc-

tion value of the contract or 1.0 percent of the total design fees associated with the contract.

Primary E&O coverage can be secured through annual (practice) policies, but D/Bs

should be aware of the limitations on these policies. First, annual policies do not provide dedicat-

ed coverage limits. Since catastrophic E&O losses can arise long after project completion, losses

on long-completed and unrelated projects can quickly exhaust coverage, leaving a D/B dangerous-

ly exposed. Second, there is no assurance that coverage for completed projects will not lapse

some time in the future. For bonded projects, sureties often advise D/Bs to secure dedicated cov-

erage under a project-specific policy with a prepaid extended reporting period (tail coverage).

The appropriate tail coverage depends on many variables, including the risk factors of the

project and the length of the statute of repose. The statute of repose limits the time period during

which an action can be brought against someone for construction-related defects. In Colorado, the

statute of repose limits actions against contractors to latent defects which are discovered within

six years of substantial completion, and which are brought within two years after they are discov-

ered.66 In many cases, it is advisable to obtain a tail of coverage that will meet the statute of

repose. E&O coverage should also be retroactive to the beginning of the pre-bid design activities.

Risk managers should pay particular attention to the need to dovetail coverage between

the CGL and E&O policies. The E&O policy should be primary to all other valid and collectible

insurance, and the insurer should not be allowed to cancel the policy unilaterally under any cir-

cumstances. Furthermore, bankruptcy or insolvency of the insured should not relieve the insurer

of its obligation under the policy. Finally, a strong Best Rating should be required of all E&O

insurers because they are insuring long-tail liabilities.

The standard CGL policy includes an exclusion for contractors’ professional liability. As a

result, a contractor’s incidental design activity may be excluded from coverage, even though such

activity is inherent in normal construction. This could include such common activities as sheeting,

shoring, formwork, and other incidental design work. Contractors should request an ISO “Limited


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Exclusion - Contractors - Professional Liability” (CG D1 14 10 14) endorsement. This endorse-

ment modifies the standard professional liability exclusion of the CGL to allow coverage for inci-

dental design exposure inherent in normal construction activity.

§ 10.3.3—Bonds For Design-Build Projects

Contractors should be aware of the potential for design liability to be assumed under their

performance bonds on design-build projects. If professional liability insurance is inadequate, your

surety may be viewed as a “deep pocket” for professional liability claims under your bond.

Uninsured professional liability can be extremely onerous to sureties and the corporations and

individuals who must indemnify them. In a design-build contract, the owner is buying both design

and construction services. As a result, the bond may be construed to cover guaranties and war-

ranties that the project will perform as intended and without design flaws. See Chapter 12,

“Construction Sureties.”

Difference Between Bonds and Insurance

Bond premiums represent a relatively small fee for underwriting a contractor and provid-

ing certain guarantees to third parties. Sureties underwrite the contractor’s financial strength, orga-

nizational capacity and character to determine whether the contractor can meet the proposed obli-

gations. They also determine whether the contractor has the personal and corporate worth to make

the surety whole again should the surety have to “step in” to protect a third party from loss.

Surety is underwritten on the basis that, although claims may be paid to third parties, no losses

should be incurred since contractors (corporately) and their principals (personally) indemnify and

ultimately make the surety whole again. Alternatively, insurance is a “loss sharing” mechanism

where relatively large premiums reflect a policy’s share of expected future losses from that class

of business.

Surety bonds are extremely inadequate to assume losses and defense costs associated with

professional liability exposures. If they were structured to cover loss sharing, bond premiums

would be extraordinarily large. Furthermore, since surety bonds by definition do not provide pro-

tection to the principal (the design-builder), long-tail liabilities would ultimately fall upon and

could quickly bankrupt the design-builders and personal indemnitors to the surety — often with-

out reliable limitations of time.

The performance bond is not the appropriate vehicle to finance E&O risk. It is best to

direct these liabilities to the E&O insurance policy, hopefully delineated in the contract specifica-

tions. Specifically exclude design performance, errors and omissions in design, and warranty of

design from the performance bond guarantee through language in the performance bond or the

underlying design-build contract. The design-build contract should also make a clear distinction

between the contract price for design services and the contract price for construction services. The

penal sum of the performance bond should be based upon the construction portion only. This way,

the owner is able to secure its usual surety guarantees for construction performance while protect-

ing itself from design negligence, errors, and omissions through E&O insurance specifications. A

sample bond or contract provision would be:


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The bond does not cover any responsibility for negligence, errors or omissions in

design, or warranty of design. Coverage under the bond is limited to only the con-

struction phase and post-construction phase of the contract. The Bond premium is

based only upon the value of the construction and post-construction phase of the

contract, and not upon the design aspect of the contract.

§ 10.4.1—Trust Fund Statute

Colorado’s mechanic’s lien statute includes a section which provides that all funds dis-

bursed to any contractor or subcontractor for the payment of any subcontractor, material supplier,

or laborer must be held in trust for the payment of the subcontractors, material suppliers, or labor-

ers who may have a lien against the property, or who may have a claim against a principal or

surety.67 This section does not apply to any contractor who has furnished a performance or pay-

ment bond, or if the owner of the property has executed a written release to the contractor.68 This

section also does not require a contractor who has furnished a bond to hold funds in trust if the

contractor has a good-faith belief that the lien or claim is not valid, or if the contractor in good

faith claims a setoff, to the extent of the setoff.69 The contractor is required to maintain separate

accounting records for each project or contract, but is not required to maintain separate bank

accounts.70

The Colorado trust lien statute has been held to be a statutory trust,71 as well as a con-

structive trust.72 Pursuant to the trust obligations imposed by C.R.S. § 38-22-127, a corporate offi-

cer can be held personally liable for the corporation’s breach of trust to pay its subcontractors and

suppliers from the funds it receives.73 An unsecured subcontractor or supplier claiming an interest

under this section takes priority over a perfected security interest in all present and future accounts

receivable and proceeds of accounts.74 Similarly, under the Colorado public projects lien statute,75

a bank has no security interest in that portion of the funds due from the construction contract until

such time as all suppliers of labor and materials have been paid.76 Finally, the provision for 12

percent interest in C.R.S. § 38-22-101(5) applies only to mechanic’s lien claims, and does not

apply to the trust lien statute, which is a separate and distinct theory of relief.77

Any person who violates the provisions of subsections (1) and (2) of the trust fund statute

commits theft, as defined in C.R.S. § 18-4-401.78 “The trust lien statute is a strictly civil provision

which cannot itself serve as the basis for a criminal action. The state may choose to treat the

actions of the contractor as a criminal matter, but any such prosecution must be charged and

proved under the theft statute.”79 Each of the essential elements of theft as set forth in C.R.S.

§ 18-4-401 must be proven beyond a reasonable doubt, including specific intent.80 This require-

ment of proof of all the elements of theft for conviction prevents the lien statute from violating the

constitutional prohibition against imprisonment for debt.81 Due to the elements of proof required,

the theft provisions of the trust fund statute are often difficult to use.82 However, in the context of

theft of construction trust funds, it is not necessary to have a conscious objective to deprive anoth-

§ 10.4 • STATUTORY RIGHTS, DUTIES, AND RESPONSIBILITIES


(10/07) 10-17

er of the funds.83 It is only necessary for “the offender to be aware that his manner of using the

trust funds is practically certain to result in depriving another person of the use or benefit of the

funds.”84 Moreover, in an action for theft, the rightful owner of the funds may recover up to three

times the amount of actual damages sustained by him or her, as well as costs and reasonable attor-

ney fees.85 See § 19.5.

§ 10.4.2—Premises Liability Statute

The premises liability statute, codified at C.R.S. § 13-21-115, establishes the exclusive

remedy against a landowner by a person who is injured on the landowner’s property.86 The defini-

tion of “landowner” under the statute clearly encompasses contractors while in possession and

control of a job site, and responsible for the activities and conditions on the property.

For purposes of [the premises liability statute], “landowner” includes, without lim-

itation, an authorized agent or a person in possession of real property and a person

legally responsible for the condition of real property or for the activities conducted

or circumstances existing on real property.87

Therefore, the duties which a contractor owes to persons (non-employees) coming onto

the contractor’s job site are governed by the premises liability statute. A “contractor is subject to

the same liability, and enjoys the same freedom from liability, as the possessor of land, for physi-

cal harm to others entering the land, caused by a dangerous condition while the work is in his

charge.”88 In Mile High Fence Co. v. Radovich,89 a fence contractor was found to be negligent for

leaving post holes unprotected on private property adjacent to a public alley. The contractor

should have reasonably foreseen the probability that someone using the alley might inadvertently

step into the post holes and injure themselves. Under the circumstances, the law imposes a duty

on the contractor “to warn or protect those using the public way from the dangerous condition.”90

Similarly, a janitorial company has been held to be a “landowner” with respect to a building it

was responsible for maintaining.91

An independent contractor engaged in highway repair or construction has a duty to exer-

cise ordinary care and prudence to protect motorists from injury as a result of the construction

work and to warn the traveling public if the highway is closed. When a “contractor is actively

engaged in repairing or rebuilding a section of road, and is in control of the work and the section

of road under construction, he is chargeable with knowledge of the condition of that road and of

any defects which might occur by virtue of the work he is performing on it.”92

In Lindaur v. LDB Drainlaying, Inc.,93 a contractor installed an underground pipe which

had not been properly backfilled and compacted. Even though the work was not completed, the

contractor left the work unfinished for three months. A racehorse fell into a muddy trench and was

injured. Ordinarily, after an owner accepts the work, a contractor who has completed a project is

not responsible for maintaining the property, or liable for damage resulting from using the proper-

ty in its defective condition. However, a person is liable for injuries caused by his or her actions

when that person makes the premises unsafe and dangerous, and then leaves the premises in that

condition.


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History of the Premises Liability Statute

Until 1971, a landowner’s liability in Colorado continued to be based exclusively on

whether the injured party was classified as an invitee, a licensee, or a trespasser, and on the corre-

sponding common law duties owed to each.94 However, the application of the common law rules

often resulted in harsh decisions, and in 1971 in Mile High Fence v. Radovich,95 the Colorado

Supreme Court formally rejected the use of the common law classifications as the sole factor for

determining the duty a landowner owed to a person coming onto his or her land.96 Applying gen-

eral negligence principles, the court stated that a person’s status as an invitee, a licensee, or a tres-

passer was only one factor that the court could consider in determining the landowner’s liability

for injuries to a person upon his or her premises.

In 1986, the General Assembly enacted C.R.S. § 13-21-115, to statutorily govern premis-

es liability and to resurrect the common-law classifications that Mile High Fence had dismissed.97

However, in 1989, Gallegos v. Phipps held that the premises liability statute enacted in 1986 vio-

lated federal and state guarantees of equal protection by affording more protections to licensees

than to invitees, and because responsibility for a trespasser’s injuries was unfairly shifted from the

trespasser to the landowner.98 The General Assembly subsequently amended § 13-21-115 in 1990

to address the inequities identified by the supreme court.99

The 1990 version of the statute once again tied the duty of a landowner to the status of

the injured person as an invitee, a licensee, or a trespasser. The duties owed to a trespasser

remained the same as those at common law. However, the duties owed to an invitee and a licensee

were substantially redefined.

At common law, trespassers and mere licensees took the premises as they found them,

and were not entitled to recover for injuries sustained while on the landowner’s premises.100 The

outcomes of these cases were often harsh, and were determined as a matter of law based solely

upon the injured person’s status as a trespasser or a licensee. The landowner owed a duty to tres-

passers at common law not to willfully injure them and to exercise reasonable care, after becom-

ing aware of their presence, not to injure them by an affirmative act or force set in motion.101

Under the statute, “a trespasser may recover only for damages willfully or deliberately caused by

the landowner.”102

The owner of a premises owed a duty to licensees at common law to have the premises in

reasonably safe condition and to warn of concealed defects.103 Under the statute, a licensee may

recover only for damages caused by “the landowner’s unreasonable failure to exercise reasonable

care with respect to dangers created by the landowner of which the landowner actually knew,” or

“by the landowner’s unreasonable failure to warn of dangers not created by the landowner which

are not ordinarily present on property of the type involved and of which the landowner actually

knew.”104

Under the statute, “an invitee may recover for damages caused by the landowner’s unrea-

sonable failure to exercise reasonable care to protect against dangers of which he actually knew or

should have known.”105 Moreover, a licensee may recover in all of the circumstances under which


(10/07) 10-19

a trespasser could recover, and an invitee may recover in all the circumstances under which a tres-

passer or licensee could recover.106

Under the statute, “‘trespasser’ means a person who enters or remains upon the land of

another without the landowner’s consent.”107 A “‘licensee’ means a person who enters or remains

on the land of another for the licensee’s own convenience or to advance his own interests, pur-

suant to the landowner’s permission or consent. ‘Licensee’ includes a social guest.”108

“Invitee” includes a “person who enters or remains on the land of another to transact busi-

ness in which the parties are mutually interested or who enters and remains on such land in

response to the landowner’s express or implied representation that the public is requested, expect-

ed, or intended to enter or remain.”109 The owner, the architect, subcontractors, and material sup-

pliers would all be classified as invitees.

The statute reestablished the status classification for those who enter onto the land as invi-

tees, licensees, and trespassers, and redefined when licensees and invitees can recover from a

landowner. However, the landowner’s duty to one on his or her property is still governed, in part,

by the rules adopted in Mile High Fence Co. v. Radovich.110 Mile High imposes a duty to furnish

a reasonably safe place to work, even for a non-employee, independent contractor, because of the

foreseeability of harm to the construction worker.111

Duty to Licensees

A licensee is a person who enters or remains on the contractor’s job site, with the contrac-

tor’s permission or consent, for his or her own convenience or to advance his own interests.

Licensee includes a social guest, and has been interpreted to include a police officer,112 a fire

fighter,113 and public works employees.114 Other examples of licensees include independent food

vendors, building inspectors, OSHA inspectors, and newspaper reporters, who enter the property

with the contractor’s permission.

Colorado has never adopted a fireman’s rule that a landowner owes “no duty” toward

firemen.115 In an early case decided under common law principles, Lunt v. Post Publishing Co.,116

a fire fighter answering an alarm to extinguish what mistakenly appeared to be a fire, inhaled

nitric acid fumes and subsequently died. The court classified Lunt as a licensee and concluded

that the duty owed by a landowner to a licensee did not include warning of hidden dangers. Luntdid not adopt a rule that landowners owed no duty to a fire fighter. It merely held that a landown-

er owed a fire fighter the duty owed to a licensee.

In Mile High Fence Co., a police officer while on patrol was injured when he stepped into

a post hole that the fence company had dug on private property. Mile High Fence Co. clearly

overruled Lunt insofar as Lunt held that the status of a public employee as a licensee determined

what duty was owed.117 However, Mile High Fence was later overturned by the premises liability

statute in 1990, which reestablished the status classifications and redefined the duties a landowner

owes to a licensee. Neither Lunt, Mile High Fence, nor any subsequent cases in Colorado have

expressly adopted a fireman’s rule that no duty is owed to fire fighters or police officers.118


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In Bath Excavating, the Colorado Supreme Court thoroughly analyzed the fireman’s rule

and declined to adopt such a rule because Bath Excavating involved a water department worker,

not a fire fighter or a police officer. The court expressed no view on the question of whether

Colorado should judicially adopt a no-duty fireman’s rule in the future. Under current Colorado

law, fire fighters, police officers, and other public works employees would be classified as

licensees, and the duty owed by a landowner as defined in the premises liability statute would

apply. “A licensee may recover only for damages caused [b]y the landowner’s unreasonable fail-

ure to exercise reasonable care with respect to dangers created by the landowner of which the

landowner actually knew, or [b]y the landowner’s unreasonable failure to warn of dangers not cre-

ated by the landowner which are not ordinarily present on property of the type involved and of

which the landowner actually knew.”119

Trespassers and the Doctrine of Attractive Nuisance

Adults or children who enter a contractor’s job site without the contractor’s consent or

permission are classified as trespassers. A trespasser may recover only for damages willfully or

deliberately caused by the contractor.120 However, this duty may be expanded by the doctrine of

attractive nuisance, in some instances involving children under the age of 14.

At common law, no duty was owed to trespassing children to keep dangerous conditions

from the land, or to use care toward trespassing children, although the landowner could not will-

fully set a trap for a child tempted to trespass.121 The attractive nuisance doctrine was defined as

maintaining an attraction which entices a child to trespass, not merely one that entices a child

after he or she has already become a trespasser.122 In Hayko, a trespassing nine-year-old boy

entered a shack in a mining camp and then found a box of dynamite caps. While he was playing

with one of the caps, it exploded and injured several of his fingers. The court determined that,

since he could not see the box of caps until after he trespassed, the caps could not be considered

an attraction to trespass. The attractive agency must be an unusual thing, of unusual attraction, not

an ordinary thing. The mining shack was usual and ordinary.

Relying on the Hayko decision, another Colorado Supreme Court case decided prior to

the premises liability statute, Garel v. Jewish Community Centers of Denver,123 held that the

attractive nuisance doctrine did not apply to a trespassing ten-year-old boy who fell from an

unguarded landing in an unfinished building under construction.

In 1971, Colorado’s common law scheme governing landowner’s liability was abolished

by Mile High Fence Co. v. Radovich.124 “Mile High Fence remained in effect until May 16, 1986,

when the General Assembly enacted [the premises liability statute]125 for the explicit purpose of

resurrecting the common-law classification scheme laid to rest by Mile High Fence.”126 Specifi-

cally, the premises liability statute was designed so that the responsibility for a trespasser’s injur-

ies fell once again upon the trespasser.127 The Colorado Supreme Court in Gallegos v. Phippsdetermined that the 1986 version of the premises liability statute violated constitutional guarantees

of equal protection, however.128 Thereafter, in 1990, the General Assembly amended the premises

liability statute “to promote a state policy of responsibility by both landowners and those upon the

land” and to “assure that the ability of an injured party to recover is correlated with his status as a

trespasser, licensee, or invitee.”129


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Both the original statute drafted in 1986, and the amendment drafted in 1990, include the

same language regarding the doctrine of attractive nuisance. In any civil action brought against a

landowner by a person who is injured on the property of another, the landowner is only liable as

provided in the statute, based on the injured party’s status as a trespasser, licensee, or invitee.130

This section shall not be construed, however, “to abrogate the doctrine of attractive nuisance as

applied to persons under fourteen years of age. A person who is at least fourteen years of age but

is less than eighteen years of age shall be presumed competent for purposes of the application of

this statute.”131

There have been no Colorado cases defining an “attractive nuisance” since the premises

liability statute was adopted in 1990. Since Mile High Fence only overturned the common-law

classification scheme, it is reasonable to assume that the definitions of an attractive nuisance pro-

vided by Hayko and Garel still apply. Under the statute, a landowner owes a duty to trespassers of

all ages not to willfully or deliberately cause them harm.132 Some attractive agencies may amount

to an invitation to a child under the age of 14.133 In these cases, it may be reasonable to impose on

the landowner the duty owed to an invitee. However the agency must invite the child to trespass,

and not merely be discovered after the trespass has occurred. It must be an unusual thing, unusu-

ally, extraordinarily attractive, and “not an ordinary matter like a pile of lumber or bricks, or a

railway station, or a stable, or a pile of cross-ties, or an apple tree, or a shack in a coal camp,”134

or an unguarded landing in an unfinished building under construction.135 It should also be noted

that in 2004, the supreme court held that the legislative preservation of the attractive nuisance

defense necessarily excluded the open and obvious danger doctrine.136

§ 10.4.3—Workers’ Compensation Act

A general contractor owes a duty of ordinary care to provide all employees a reasonably

safe place in which to work, including employees of the contractor, the subcontractors, the mate-

rialmen, and independent contractors. The general contractor is liable as the “statutory” employer

for all of the subcontractor’s employees if their immediate employer is uninsured for workers’

compensation or financially irresponsible.137 The contractor can shield itself from this ultimate

liability for injury to its employees and the employees of subcontractors by purchasing and main-

taining workers’ compensation insurance138 on these individuals.139 See §§ 6.7.2, 7.4.5, 12.4.3,

and 22.15.

Duty to Employees

The Workers’ Compensation Act is founded on the public policy of providing monetary

relief for workmen injured on the job, “regardless of the negligence of the employer or the lack of

negligence on the part of the employee.”140 “The underlying concept is one of ‘no fault.’”141 The

“workmen’s compensation laws not only preclude an employee from suing his own employer for

damages, but also preclude a third person from seeking indemnity from that employer with

respect to the same accident.”142

Duty to Subcontractors — Statutory Employer

It is the policy in Colorado, and the great majority of states, to make the more financially

solvent general contractor ultimately responsible for workers’ compensation benefits arising out of

injuries to employees of all subcontractors.143 The general contractor is liable as the “statutory”


10-22 (10/07)

employer for all of the subcontractor’s employees if their immediate employer is uninsured for

workers’ compensation or financially irresponsible.144 In return for this ultimate statutory liability,

the general contractor is relieved of any liability for negligence, contribution,145 or action of any

kind by providing workers’ compensation insurance on the contractor’s employees, as well as the

subcontractor’s employees.146 The general contractor is granted immunity as a statutory employer

from negligence actions by an injured employee of a subcontractor or an independent contractor.147

This statutory immunity applies when (1) the work contracted out is part of the normal

business operations of the contractor, and (2) the work performed is such that, in the absence

of the subcontractor’s services, the work would of necessity be provided by the contractor’s

employees.148

Prior to 1963, the workers’ compensation statute provided that the general contractor

could be sued for negligence by an injured employee of a subcontractor, even if the subcontractor

was properly insured under the Workers’ Compensation Act, and even though the subcontractor’s

employee had received workers’ compensation benefits under the Act.149 In J&K ConstructionCo. v. Molton, a general contractor was found to be negligent in causing injuries to a subcontrac-

tor’s employee from an improperly installed steel truss. The Colorado Supreme Court determined

that a “general contractor owes a duty of ordinary care to provide the employees of a subcontrac-

tor a reasonably safe place in which to work.”150 The injury in J&K, however, occurred in 1960.

“In 1963, the statute was amended to preclude such a suit whether or not the subcontractor was

properly insured.”151 The general contractor still owes a duty to provide a reasonably safe work-

place; however, the statute is now the exclusive remedy for a subcontractor’s employees or for

independent contractors152 against a general contractor for injuries received on the jobsite.

Subcontractors are not subjected to this ultimate liability for injuries to employees of the

general contractor or the employees of other subcontractors. Therefore, subcontractors are not

immunized from common law actions by employees of the general contractor or other subcon-

tractors.153 The Colorado Supreme Court determined that this does not create a denial of equal

protection.154

Duty to Employees of Materialmen

The statutory employer protection afforded to contractors under the Workers’ Compensa-

tion Act does not extend to the employees of material suppliers. The term “subcontractor” was not

intended to include suppliers of goods and materials, who send employees onto the job site only

for the purpose of delivering goods.155 Therefore, the employee of a material supplier is not

barred from bringing a common-law action against a general contractor because the general con-

tractor is not the statutory employer for material suppliers under Colorado’s Workers’

Compensation Act.156

§ 10.4.4—Occupational Safety And Health Act

The Occupational Safety and Health Act157 creates “a general duty for an employer to

protect its employees from hazards that are likely to cause death or serious bodily injury at the

work site.”158 In Canape v. Peterson, Canape, the employee of a material supplier, was injured

while unloading roofing materials and stacking them on a partially finished roof. The Colorado


(10/07) 10-23

Supreme Court rejected the theory that an OSHA violation constituted negligence per se because

Canape was not employed by the contractor or any of the subcontractors employed to work at the

job site. A negligence per se theory based on an OSHA violation applied to a material supplier

would improperly enlarge the contractor’s common-law tort liability. Also, a material supplier

delivering materials to the job site was not within the class of persons intended to be protected by

the OSHA regulations.

Although violation of an OSHA regulation may not constitute negligence per se, the regu-

lation at issue may be admissible as evidence of the standard of care that the contractor is obligat-

ed to exercise.159 See Universal Construction Co. v. OSHA.160 See also §§ 13.3.2, 13.3.9, 13.4.1,

13.6.1, and 22.13.

Stephen A. Hess, P. Douglas Folk, Jerry Bales, and Ty Holt, eds., Design Professional andConstruction Manager Law (ABA Publishing 2007).

Mark V. Niemeyer, “Risk Management and Surety Solutions for Design-Build Contractors,”

CFMA Building Profits, 30-38 (September/October 1998). Excerpts reproduced from

CFMA Building Profits with the permission of the Construction Financial Management

Association, Princeton, NJ.

Mark V. Niemeyer, “Managing Risk,” Constructor Magazine (June 1998); and “Bonded Design-

Build Projects,” Constructor Magazine (August 1998). Excerpts reprinted with permis-

sion of the author.

The Design/Build Deskbook (John R. Heisse and James S. Schenck, eds., ABA Publishing, Third

Ed. 2004).

Charlotte R. Robinson, “Design-Build Contracts For Colorado Highway Construction: New

Contractual Issues - Part I,” 49 Colo. Law (Feb. 2000).

Design-Build For The Public Sector (Michael C. Loulakis, ed., Aspen Publishers 2003).

Kathryn S. Krause, Esq., Author (1999), Attorney at Law and Mark V. Niemeyer, Author (1999), Hess,Egan, Hagerty & L’Hommedieu, Inc., were previous contributors to this Chapter.

1. See Chapter 3, “Private Construction Contracts,” for a discussion of general rules of contract

construction.

2. The general statute of limitations for construction work in Colorado, however, starts the run-

ning of the statute of limitations at the time the owner discovers or reasonably should discover the physical

manifestations of the asserted defect that causes an injury. C.R.S. § 13-80-104(1)(b)(I).

3. Jim Arnott, Inc. v. L & E, Inc., 539 P.2d 1333, 1336 (Colo. App. 1975); Newcomb v. Schaeffler,

279 P.2d 409, 412 (Colo. 1955); Zambakian v. Leson, 246 P. 268, 269 (Colo. 1926).

NOTES

§ 10.5 • BIBLIOGRAPHY


10-24 (10/07)

4. Hensel Phelps Constr. Co. v. General Signal Corp., 460 F.2d 109, 110 (10th Cir. 1972); KaibabLumber Co. v. Osburne, 464 P.2d 294, 295-96 (Colo. 1970). See May Dept. Stores Co. v. University Hills,Inc., 789 P.2d 434, 439 (Colo. App. 1989) (“substantial completion” for purposes of the statute of limita-

tions in C.R.S. § 13-80-104 requires no more than that required for “completion” under C.R.S. § 38-22-

109(4), the mechanic’s lien statutes).

5. See Hensel Phelps, 460 F.2d at 110-11.

6. See Appendix A, AIA Doc. A-201, ¶ 9.8.1 (1997).

7. See also Rhody, “Defining ‘Substantial Completion’ in Construction Defect Actions,” 27 Colo.Law. 73 (Oct. 1998); Greenwald, “Substantial Completion as It Relates to the Colorado Mechanic’s Lien

Act,” 26 Colo. Law. 45 (Feb. 1997).

8. C.R.S. § 24-91-103.5.

9. See generally W.C. James, Inc. v. Phillips Petroleum Co., 347 F. Supp. 381, 385 (D. Colo.

1972).

10. Jensen Constr. Co. v. Dallas County, 920 S.W.2d 761, 770-71 (Tex. Ct. App. 1996); CorinnoCiretta Const. Corp. v. City of New York, 493 N.E.2d 905 (N.Y. 1986). But see U.S. v. Metric Constructors,Inc., 480 S.E.2d 447, 448-51 (S.C. 1997) (no exception for delays beyond the parties’ contemplation).

11. See Chapter 18, “Construction Disputes,” for additional analysis of no-damages-for-delay

clauses.

12. See generally Cheri Turnage Gatlin, “Contractual Limitations on the Right to Recover Delay

Damages and Judicial Enforcement of Those Limitations,” 22 Cons. Law. 32 (Fall 2002).

13. See Boulder Med. Center v. Moore, 651 P.2d 464, 466 (Colo. App. 1982) (injunctive relief may

be available notwithstanding the existence of a liquidated damages provision).

14. Board of County Comm’rs of Adams County v. City and County of Denver, 40 P.3d 25, 29

(Colo. App. 2001); see also H.M.O. Sys., Inc. v. Choicecare Health Servs., Inc., 665 P.2d 635, 638 (Colo.

App. 1983); Broderick Wood Prods. Co. v. U.S., 195 F.2d 433, 438 (10th Cir. 1952).

15. See Carnes v. Arapahoe Vending, Inc., 487 P.2d 593, 596 (Colo. App. 1971); Broderick WoodProds. Co., 195 F.2d at 438. See C.R.S. § 4-2-718 (in context of a sale of goods, liquidated damages must

be reasonable in light of the anticipated and actual harm caused by the breach). See Chapter 23 for an analy-

sis of the applicability of the UCC to construction contracts.

16. Broderick Wood Prods. Co., 195 F.2d at 438.

17. C.R.S. § 24-91-103.5(2)(c).

18. Medema Homes, Inc. v. Lynn, 647 P.2d 664, 667 (Colo. 1982) (en banc); City of Westminster v.Centric-Jones Constructors, 100 P.3d 472 (Colo. App. 2003), cert. granted in part, 2004 Colo. LEXIS 885

(Colo. Nov. 8, 2004).

19. In some cases, liquidated damages are imposed at a reduced rate after substantial completion

but before final completion.

20. See § 10.2.1, above.

21. See Appendix A, AIA Doc. A-201 ¶ 8.3.1 (1997).

22. International Technical Instruments, Inc. v. Engineering Measurements Co., 678 P.2d 558, 561

(Colo. App. 1983).

23. Prutch v. Ford Motor Co., 574 P.2d 102, 104 (Colo. App. 1977), rev’d on other grounds, 618

P.2d 657, 661-62 (Colo. 1980) (consequential damages).

24. C.R.S. § 4-2-715(2)(a).

25. Colorado Carpet Installation, Inc. v. Palermo, 668 P.2d 1384, 1387-88 (Colo. 1983).

26. Cooley v. Big Horn Harvestore Sys., Inc., 813 P.2d 736, 745-47 (Colo. 1991). See also C.R.S.

§ 4-2-719 (contractual limitation of remedies under UCC sales).

27. Cooley, 813 P.2d at 747.28. Compare to contribution, which is the remedy where two parties owe a third party an indemni-

fication obligation, such that those two parties are both liable to contribute to satisfy the indemnification

obligation.

29. C.R.S. § 13-50.5-102(8).

30. Codified at C.R.S. § 13-21-111.5(6).

The Contractor Notes

(10/07) 10-25

31. Contractors who generate their own form contracts should be aware that the anti-indemnifica-

tion laws vary from state to state, and that some states bar all anti-indemnification clauses that purport to

require indemnification of a party for its own negligence. In some of these states, an unenforceable indem-

nification clause could void the entire contract, and not merely the offensive indemnification provision. See,

e.g., Sierra v. Garcia, 746 P.2d 1105 (N.M. 1987) (applying N.M.S.A. § 56-7-1).

32. Williams v. White Mountain Constr. Co., Inc., 749 P.2d 423, 426 (Colo. 1988) (en banc).

33. Public Serv. Co. of Colo. v. United Cable Television of Jeffco, Inc., 829 P.2d 1280, 1282 (Colo.

1992).

34. See Chapter 11, “Subcontractors and Materialmen,” for additional analysis of indemnity

obligations.

35. Davies v. Bradley, 676 P.2d 1242, 1245 (Colo. App. 1983); Sloat v. Matheny, 625 P.2d 1031,

1034 (Colo. 1981); Belt v. Spencer, 585 P.2d 922, 925 (Colo. App. 1978). See also C.R.S. § 4-2-316(1).

36. R.N. Robinson & Son, Inc. v. Ground Improvement Techniques, 31 F. Supp.2d 881, 889 (D.

Colo. 1998); F & S Constr. Co. v. Berube, 322 F.2d 782, 785 (10th Cir. 1963). See Chapter 3, “Private

Construction Contracts,” and Chapter 16, “Express and Implied Warranties in Construction Law,” for addi-

tional analysis of express and implied warranties.

37. Eastern Tunneling Corp. v. Southgate Sanitation Dist., 487 F. Supp. 109, 112-13 (D. Colo.

1979).

38. Newcomb, 279 P.2d at 411.

39. C.R.S. § 24-105-301(1)(d).

40. Eastern Tunneling Corp., 487 F. Supp. at 113-14.

41. Id. at 114. See also Hollerbach v. United States, 233 U.S. 165, 170-72 (1914).

42. Hahl v. Langfur Constr. Corp., 529 P.2d 1369, 1370 (Colo. App. 1974) (not selected for official

publication); Hi-Valley Constructors, Inc. v. Heyser, 428 P.2d 354, 357 (Colo. 1967).

43. Hahl, 529 P.2d at 1370-71.44. Johnson v. Bovee, 574 P.2d 513, 514 (Colo. App. 1978).

45. Carfield & Sons, Inc. v. Cowling, 616 P.2d 1008, 1009 (Colo. App. 1980); Hopkins v.Underwood, 247 P.2d 1000, 1002 (Colo. 1952).

46. See Appendix A, AIA Doc. A-201, ¶ 14.2 (1997), which allows the owner to terminate the con-

tract for additional acts of the contractor.

47. See Appendix A, AIA Doc. A-201, ¶ 14.3 (1997), which does not limit the time within which

the owner may suspend the work, and does not specify the types of costs recoverable by the contractor.

48. David C. Olson, Inc. v. Denver & Rio Grande W. R.R. Co., 789 P.2d 492, 495-496 (Colo. App.

1990).

49. Main Elec., Ltd. v. Printz Servs. Corp., 980 P.2d 522 (Colo. 1999).

50. Id. See also R.N. Robinson, 31 F. Supp.2d at 884, cited with approval in Main Elec., id.51. See Chapter 17, “Disputes Over Contract Clauses,” for additional analysis of pay-when-paid

clauses.

52. Town of Alma v. Azco Constr., Inc., 10 P.3d 1256 (Colo. 2000).

53. Grynberg v. Agri Tech, Inc., 10 P.3d 1267 (Colo. 2000).

54. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).

55. See Chapter 18, “Construction Disputes,” for an analysis of notice provision.

56. See Chapter 21, “Arbitration and Mediation of Construction Disputes,” for an analysis of ADR

provisions.

57. See Hanson v. GAB Business Servs., Inc., 876 P.2d 112, 113 (Colo. App. 1994); Covey and

Morris, “The Enforcement of Agreements Providing for Forum and Choice of Law Selection,” 61 Den. L.J.

837 (1984).

58. See Chapter 6, “Insurance for the Construction Project,” and Chapter 12, “Construction

Sureties.”

59. Jacob v. Jones, 423 P.2d 321 (Colo. 1967).

60. Meinhardt v. Investment Builders Property Co., 518 P.2d 1376 (Colo. App. 1973).

61. Codified at C.R.S. § 13-20-806(7).

Notes The Practitioner’s Guide to Colorado Construction Law

10-26 (10/07)

62. See Chapter 1, “The Construction Process and Parties,” for a more complete description of dif-

ferent forms of project delivery systems.

63. Reprinted with permission from articles by Mark V. Niemeyer. See Bibliography, § 10.5.

64. See also Chapter 8, “Architect/Engineer Liability,” for a description of the standard of care

required of design professionals.

65. See BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).

66. C.R.S. § 13-80-104(1)(a).

67. C.R.S. § 38-22-127(1).

68. C.R.S. § 38-22-127(3).

69. C.R.S. § 38-22-127(2).

70. C.R.S. § 38-22-127(4).

71. In re Specialized Installers, Inc., 12 B.R. 546, 551 (Bankr. D. Colo. 1981).

72. First Commercial Corp. v. First Nat. Bancorp., Inc., 572 F. Supp. 1430, 1435 (D. Colo. 1983).

73. Flooring Design Assocs., Inc. v. Novick, 923 P.2d 216, 221 (Colo. App. 1995); Alexander Co. v.Packard, 754 P.2d 780, 782 (Colo. App. 1988).

74. First Commercial Corp., 572 F. Supp. at 1435.

75. C.R.S. § 38-26-101 through -107 (Colo. Public Works Act).

76. Weld Colo. Bank v. E & E Constr., Inc., 653 P.2d 758, 760 (Colo. App. 1982); Heinrichsdorff v.Raat, 655 P.2d 860, 862 (Colo. App. 1982).

77. First Commercial Corp., 572 F. Supp. at 1436.

78. C.R.S. § 38-22-127(5).

79. People v. Collie, 682 P.2d 1208, 1210-11 (Colo. App. 1983), citing People v. Brand, 608 P.2d

817 (Colo. App. 1979).

80. People v. Erickson, 695 P.2d 804, 805 (Colo. App. 1984); Brand, 608 P.2d at 817.

81. Collie, 682 P.2d at 1210-11.

82. See Erickson, 695 P.2d at 805. But see Collie, 682 P.2d at 1211, and People v. Anderson, 773

P.2d 542, 544-45 (Colo. 1989).

83. Anderson, 773 P.2d at 545.

84. Id.85. C.R.S. § 18-4-405.

86. Sofford v. Schindler Elevator Corp., 954 F. Supp. 1459, 1461 (D. Colo. 1997).

87. C.R.S. § 13-21-115(1).

88. Mile High Fence Co. v. Radovich, 489 P.2d 308, 311 n.1 (Colo. 1971), citing 2 Restatement(Second) of Torts §§ 383 and 384 (overturned by the premises liability statute on other grounds).

89. Mile High Fence Co., 489 P.2d at 315.

90. Id.91. Henderson v. Master Klean Janitorial, Inc., 70 P.3d 612 (Colo. App. 2003) (but finding that

company was not liable on facts).

92. Pioneer Const. Co. v. Richardson, 490 P.2d 71, 75 (Colo. 1971).

93. Lindauer v. LDB Drainlaying, Inc., 555 P.2d 197 (Colo. App. 1976).

94. Bath Excavating & Constr. Co. v. Wills, 847 P.2d 1141, 1143 (Colo. 1993).


96. For an excellent history of the statute, see Terrance A. Noyes, “The Colorado Premises

Liability Statute,” 25 Colo. Law. 71 (May 1996).

97. See Gallegos v. Phipps, 779 P.2d 856, 861 (Colo. 1989).

98. Id. at 861-63.

99. With the exception of a redesignation of two subsections, the statute today is the same as the

statute enacted in 1990.

100. Gotch v. K. & B. Packing & Provision Co., 25 P.2d 719, 720 (Colo. 1933). (Gotch was specifi-

cally overturned by Mile High Fence Co. v. Radovich, due to its reliance solely on the status of the injured

person as a matter of law. Mile High Fence was later overturned on this same issue in 1990 by the re-estab-

lishment of status classifications in the premises liability statute; however, the duty that a landowner owes


(10/07) 10-27

to a licensee was completely redefined. Gotch and similar common law cases are, therefore, still overturned

and are included here for historical reference only.)

101. Id.102. C.R.S. § 13-21-115(3)(a).

103. Gotch, 25 P.2d at 720.104. C.R.S. §§ 13-21-115(3)(b)(I) and (II).

105. C.R.S. § 13-21-115(3)(c)(I).

106. C.R.S. § 13-21-115(3.5).

107. C.R.S. § 13-21-115(5)(a).

108. C.R.S. § 13-21-115(5)(b).

109. C.R.S. § 13-21-115(5)(c).

110. Auxier v. Auxier, 843 P.2d 93, 94 (Colo. App. 1992).

111. Id.

112. See Mile High Fence Co., 489 P.2d at 312-13.

113. See Lunt v. Post Printing & Publ’g Co., 110 P. 203 (Colo. 1910) (overturned by Mile HighFence Co., 489 P.2d at 312-13).

114. See Bath Excavating & Constr., 847 P.2d at 1145.

115. See id.116. See Lunt, 110 P. at 203.


118. Bath Excavating & Constr. Co, 847 P.2d at 1145.

119. C.R.S. §§ 13-21-115(3)(b)(I) and (II).

120. See C.R.S. § 13-21-115(3)(a).

121. Hayko v. Colorado & Utah Coal Co., 235 P. 373, 375 (Colo. 1925) (overturned by Mile HighFence Co., 489 P.2d at 313-14).

122. Id. at 374 (overturned on other grounds by Mile High Fence Co., 489 P.2d at 313-14).

123. Garel v. Jewish Community Ctrs. of Denver, 428 P.2d 714 (Colo. 1967).

124. Mile High Fence Co., 489 P.2d at 311 n. 1.

125. See C.R.S. § 13-21-115(1.5)(e).

126. Gallegos, 779 P.2d at 860-61, and n. 6.

127. Id. at 861, and n. 8.

128. Id.129. C.R.S. § 13-21-115(1.5)(a).

130. C.R.S. § 13-21-115(2).

131. Id.

132. C.R.S. § 13-21-115(3)(a).

133. Hayko, 235 P. at 374; C.R.S. § 13-21-115(2).

134. Hayko, 235 P. at 374 (citations omitted).

135. Garel, 428 P.2d at 715.

136. Vigil v. Franklin, 103 P.3d 331 (Colo. 2004).

137. C.R.S. § 8-41-401(1).

138. Id.

139. See also Chapter 22, “Employment Law in the Colorado Construction Industry.”

140. Edwards v. Price, 550 P.2d 856, 860 (Colo. 1976), citing O’Quinn v. Walt Disney Prods., Inc.,

493 P.2d 344 (Colo. 1972).

141. Edwards, 550 P.2d at 860.

142. Titan Constr. Co. v. Nolf, 515 P.2d 1123, 1124 (Colo. 1973).

143. Id., citing C.R.S. § 8-48-101(2).

144. See generally C.R.S. § 8-48-101(2).

145. See Williams, 749 P.2d at 427-29.

146. Id.

147. Edwards, 550 P.2d at 860.

Notes The Practitioner’s Guide to Colorado Construction Law

10-28 (10/07)

148. Melody Homes, Inc. v. Lay, 610 P.2d 1081 (Colo. App. 1980). See also Pioneer Constr. Co. v.Davis, 381 P.2d 22, 23-24 (Colo. 1963).

149. See Thomas v. Farnsworth Chambers Co., 286 F.2d 270 (10th Cir. 1960).

150. J&K Constr. Co. v. Molton, 390 P.2d 68, 72 (Colo. 1964).

151. Edwards, 550 P.2d at 860 n. 9.

152. Buzard v. Super Walls, Inc., 681 P.2d 520, 521 (Colo. 1984); but see Auxier, 843 P.2d at 95.

153. Edwards, 550 P.2d at 860 (citing Krueger v. Merriman Elec., 488 P.2d 228 (Colo. App. 1971),

and Frohlick Crane Serv. v. Mack, 510 P.2d 891 (Colo. 1973)).

154. Id.155. Doyle, 288 F. Supp. at 123-24.

156. Id. at 125.

157. 29 U.S.C. §§ 651 through 700 (OSHA).

158. Canape v. Petersen, 897 P.2d 762, 764 (Colo. 1995); 29 U.S.C. § 654(a)(1).

159. Scott v. Matlack, Inc., 39 P.3d 1160 (Colo. 2002).

160. Universal Constr. Co. v. OSHA, 182 F.3d 736 (10th Cir. 1999) (general contractor may be held

liable for subcontractor’s OSHA violations).


(10/07) 10-29

“COST-PLUS” CONTRACTS — CONTRACTOR’S CONSIDERATIONS

Notes on Use: Contracts between owners and contractors are often divided between the

principal agreement itself, which contains the chief negotiated terms between the parties, and a

separate set of “standard” terms and conditions. The checklist below is focused on drafting the

terms of the principal agreement between the owner and the contractor. This checklist is intended

to be used in conjunction with “General Conditions — Contractor’s Considerations” to constitute

a complete review of the contract.

Also note that there are special considerations related to “stipulated sum” or “fixed price”

contracts that are outlined below. If the cost-plus contract you are reviewing also includes a

Guaranteed Maximum Price, it is essential that the review include both this checklist and the

checklist for stipulated sum contracts (together with the checklist for general conditions).

____ Identification of Owner

____ Determine the type of entity and the status of the owner’s registration with the

Secretary of State or other responsible business registration office.

____ Determine whether the owner is a governmental or quasi-governmental agency.

Special contracting rules may apply to such entities, and it may not be apparent

from the name of the entity whether or not the entity is a government agency.

____ Where appropriate, determine whether the owner is a subsidiary, parent, or other

affiliate of the real party in interest that has been created so as to shield the real

party in interest from liability.

____ Property Issues

____ Confirm that the owner with whom the contractor is contracting is the record

owner of the property.

____ Ensure that the property described in the contract as the location of the project is

described in sufficiently detailed legal terms to enable the contractor to file liens or

otherwise to utilize the property as security.

____ When the “owner” is a tenant, confirm the contractor’s ability to lien the property

— this may include ensuring that the owner of the property has consented to the

improvements or has not posted or otherwise protected the property against liens.

The Contractor Exhibit 10A

(10/07) 10-31

EXHIBIT 10A • DRAFTING CONSIDERATIONS FOR CONTRACTORS

____ Contract Documents

____ Ensure that the enumeration of the contract documents includes all docu-

ments on which the contractor has relied in agreeing to terms with the

owner. Many contracts are written in such a manner that the “Contract

Documents” section includes (or can be read as implying) a merger clause,

under which all previous representations, promises, negotiations, and terms

are merged into the written contract.

____ Assess the extent to which bid documents should be (or will be) included as

part of the final contract documents. Bid documents can add unexpected

terms to the contract, and should be reviewed in connection with the final

contract to ensure consistency. This is especially true with respect to govern-

ment projects where an apparent successful bidder has an opportunity to

negotiate the terms of the contract.

____ Contract Time

____ Ensure that the stated date of completion is fixed from a stated or definable time of

commencement. If the time of commencement is to be fixed by the future issuance

of a Notice to Proceed, the contract should not state a specific date for completion.

By using a floating and indeterminate start date with a fixed date for completion,

the contractor could lose valuable working time.

____ Ensure that the contractor’s only time commitment is to complete the work by a

specified (or readily calculable) date. In particular, the contractor should not be

bound to adhere to a particular construction schedule. Any schedule should be fur-

nished only for the informational purposes of the owner and not as a promise to

perform in accordance either with the time limit set forth for particular tasks in the

schedule or in the sequencing of the work to be completed. By incorporating a

schedule into the contract documents without this clarification, the owner may

claim scheduling rights (and ownership of float) that the contractor wishes to

retain.

____ Ensure that the contract is clear that any “float” belongs to the contractor. Courts

have disagreed as to who is entitled to the benefit of additional or uncommitted

time in the schedule, and by leaving open the prospect that an owner can claim the

benefit of such additional time, the contractor loses potentially valuable accelera-

tion claims (or has its delay claims undercut).

____ Funding

____ Determine the sufficiency of the funding mechanism through which a private

owner intends to finance its project, and verify that the contract provides adequate

protection to the contractor in the event the owner is unable to finance the proper-

ty. This may include a pre-construction assessment of the value of the equity in the

property, financial disclosures or guarantees from the owner, or other means of

verifying financing.

Exhibit 10A The Practitioner’s Guide to Colorado Construction Law

10-32 (10/07)

____ When the owner is a government entity, research applicable finance and spending

limitations so as to ensure that adequate funding is committed for the project,

including funding mechanisms for any reasonable changes that may be made dur-

ing the course of construction. Many government entities are limited in the amount

of money they may commit to capital projects, either by spending limitations or by

laws that require pre-construction authorization of funding. A contractor’s failure

to recognize such funding limitations may put it in the position of facing barriers

to its collection of payment.

____ Price. In a cost-plus contract, the principal goal should be to draft clear terms defining the

costs that may be charged to the owner. Several specific terms deserve special attention:

____ Self-performed work. When the contractor contemplates performing a portion of

the underlying scope of work with its own forces, the contract should be clear in

allowing the costs associated with such self-performed work to be recovered as

part of the contract costs (as opposed to being considered part of the overhead for

which the contractor is compensated separately). In defining recovery for self-per-

formed work, the contract should be careful to distinguish those elements of the

contractor’s internal costs that can be charged as separate cost items for self-per-

formed work, such as labor burdens.

____ Small-tool allowance. The costs of work should include some basis for compensat-

ing the contractor for the use of its own small tools that are consumed over a peri-

od of years. This allowance is typically charged as a percentage of costs rather

than on a periodic rental schedule.

____ Contractor-owned equipment. The contractor should be permitted to recover some

costs for use of large equipment that the contractor owns. Typically, the parties will

agree to a schedule of values that will set forth hourly, daily, or other periodic rates

that may be charged to the owner.

____ Overhead. The contract should make a specific allocation of field overhead that

can be recovered as part of the underlying cost of the contract, which ordinarily

excludes any component of home office overhead (home office overhead is usually

recovered as part of the “plus” component of a cost-plus contract).

____ Supervision. The owner may well assume that the cost of on-site supervisory per-

sonnel is borne by the contractor as part of its overhead, and not as a separately

recoverable item. To the extent that the contractor has priced the contract by

assuming that it will be entitled to recover its costs for field personnel and supervi-

sion, this expectation should clearly be delineated in the contract so as to leave no

question as to whether (and which) field personnel and supervisory personnel are a

reimbursable cost or a non-reimbursable component of overhead.

____ Specific Exclusions. Ensure that specific exclusions that the owner seeks to be

carved out from allowable “costs” are consistent with the remainder of the cost

structure.


(10/07) 10-33

____ Treatment of Contractor’s Rebates, Refunds, Discounts, House Credits for Volume, etc.

Established contractors very often work out concessions from suppliers that grant the con-

tractor certain benefits in consideration for continued purchases. These concessions may

include volume-based rebates, credits to house accounts, price discounts, refunds, or other

monetary compensation for the parties’ continuing business relationship. The contract

should specify which monetary benefits are the sole property of the contractor. In some

cases, such as discounted prices for volume buying, the contractor’s “entitlement” to such

pricing concessions may not appear very compelling, and the “cost” portion of the contract

may be written in a manner such that the contractor can only charge the discounted price to

the job. On the other hand, when a financial concession such as a rebate or a house account

credit is granted by a supplier based on the totality of work that a contractor performs in

connection with the supplier, the case for passing along the discount or other concession is

not as clear. In any event, the contract should be clear as to how such concessions are treat-

ed in compensation of the contractor.

____ Price: Defining the “Plus” Portion of the “Cost-Plus” Contract. The “plus” portion of the

cost-plus contract ordinarily includes an allowance for profit and for general overhead that

is not specifically recoverable as an element of costs. The contract should be clear as to

what the “plus” portion of the contract is intended to compensate the contractor for, so as to

avoid disputes about recoverable costs versus non-recoverable overhead. As noted above,

questions concerning these issues may arise in connection with home office overhead, field

personnel of the contractor, supervisory personnel, etc. There is no “right” allocation of

items, but it is important that the parties understand and agree at the outset of the contract

with respect to what is separately compensable and what is not.

____ Price: Guaranteed Maximum Price. When the cost-plus contract includes a term that fixes

the maximum cost that the contractor will be entitled to recover, such a Guaranteed

Maximum Price shifts much more emphasis into the drafting of the scope of work than

might otherwise be necessary in a cost-plus contract. The reason for this is simple: as the

actual cost of construction reaches and exceeds the GMP, the owner will benefit by constru-

ing as many items as being within the scope of work as possible, while the contractor will

benefit from construing as many items as possible as falling outside the initial scope of

work. Accordingly, a GMP contract leaves open the prospect that there will be substantial

disagreements concerning the contractual scope of work. An attorney reviewing a cost-plus

contract that also includes a Guaranteed Maximum Price should be careful to review the

checklist related to stipulated subcontracts.

____ Scope of Work. In a contract where compensation is fixed solely by reference to the con-

tractor’s out-of-pocket costs and the contractor’s allowance for overhead and profit, there

may be little reason to spend much time reviewing the project scope of work. In the end,

whether the scope of work is expanded or narrowed and whether work is technically within

or outside the initial scope of work proves to be irrelevant; the contractor’s compensation is

determined with no reference to the scope of work, and disputes over scope of work are rel-

atively rare in cost-plus contracts.


10-34 (10/07)

____ Budget Estimate

____ Ensure that the budget estimate does not become a binding term under the stipulat-

ed sum contract. An owner reasonably might ask for a budget estimate for purpos-

es of financial planning, and where financing of the project is provided by a lender,

the lender may request a budget in advance of construction for purposes of regulat-

ing disbursements under the loan and for serving as a basis for estimates in pay-

ment applications. Although these uses are perfectly appropriate, the owner should

understand that a stipulated sum contract fixes the price at which construction will

be completed, and that any budget provided for planning purposes cannot be used

to vary the stipulated sum. In particular, owners should understand that any savings

in individual line item costs does not give the owner additional money to spend,

just as any cost overruns in individual line items are never borne by the owner.

____ When a budget is provided that contains an express contingency, ensure that the

owner understands and acknowledges that the contingency is a planning tool for

the contractor, that the contractor is not obligated to account to the owner for

expenditure of the contingency, and that the contingency is not an “allowance” that

the owner may spend as part of the stipulated sum in the event that the contractor

does not exhaust the contingency.

____ Audit Rights. In a stipulated sum contract, the owner should not be given the right to audit

the books and records of the contractor for purposes of cost verification. The contractor’s

actual costs in performing a stipulated sum contract (absent a time- and materials-based

change order or a price calculated in part on unit prices) have no bearing on contract per-

formance or the parties’ respective rights and obligations.

____ Indemnification

____ Verify that the scope of the indemnification provided in the contract is legal under

state law. Many states bar indemnification in whole or in part, primarily where the

indemnitee seeks indemnification regardless of its own fault in causing the loss or

damage at issue. In some states, an illegal indemnification clause will void the

entire contract; in other states, a void indemnification clause may be stricken, leav-

ing the remainder of the contract enforceable. Finally, some states bar indemnifica-

tion provisions in government contracts only but allow enforcement of such provi-

sions in private contracts.

____ Ensure that the indemnification provision is mutual; that is, ensure that each party

has the obligation to indemnify the other for any losses the other suffers that are

caused by the indemnitor. Such cross-indemnification clauses need to be drafted

carefully, of course, so they do not effectively cancel each other out in the event of

a dispute.

____ Ensure that any indemnification obligation undertaken by the contractor is covered

adequately by the contractor’s insurance.


(10/07) 10-35

____ Where indemnification is required, the contractor may also request as a condition of

indemnification that defense against the alleged claim be tendered to the contractor

as a means of allowing the contractor to control both the risk of exposure and the

expense of providing a defense. When the contractor is required to bear the owner’s

cost of defense through separate counsel, such cost of defense may easily approach

the ultimate liability, making any defense on the merits ultimately ineffective.

____ Ensure that any indemnification right is conditioned on timely notice from the

owner of the claim being asserted.

____ Payments

____ Interim payments are typically based on costs expended: payment terms for a cost-

plus contract should be scheduled so as to permit the earliest possible reimburse-

ment to the contractor for all out-of-pocket expenses recoverable under the con-

tract. The contract should not envision any payment schedule that is based on a

percentage-of-completion method, as the percentage-of-completion calculation of

payments due the contractor is appropriate for stipulated subcontracts rather than

for cost-plus contracts.

____ In addition to reimbursing the contractor for actual costs expended, the contractor

may wish to include advance payment for specially manufactured items and items

for which there are long lead-times for delivery. This ensures that the contractor

does not end up financing the project by coming out of pocket for expenses that it

may not be able to bill to the owner until later in the contract period.

____ Ensure that the contract specifies the manner and timing in which the contractor

will recover its overhead and profit for the project.

____ Retainage. Although most contracts allow for the retention by the owner of a portion of the

contract price until substantial completion, many jurisdictions impose limitations on the

amount of retention that can be withheld by the owner. Any retainage set out in the contract

should be measured against applicable statutes to ensure consistency. In addition, ensure

that retention is released upon substantial completion, less any reasonable withholding nec-

essary to satisfy any punchlist obligations of the contractor.

____ Insurance. During the contracting process, it is likely that the owner will request status as a

primary insured or, at the very least, as an additional named insured. Verify that insurance

coverage as required by the contract is available and in place, and that any requested

endorsements have been procured. The contractor’s failure to procure required insurance

may expose the contractor to substantial additional damages.

____ Termination for Convenience. Ensure that the contractor is entitled to some compensation

for early termination for convenience by the owner. Ideally, the contractor would be entitled

to recover any profit it would have made on unfinished work. At the very least, the contrac-

tor should not be expected merely to recover its costs into the job before termination, as such

a term leaves the contractor subject to unreasonable risk of loss of its anticipated profit.


10-36 (10/07)

____ Standard of Care. It may be advantageous in the agreement to specify that the contractor’s

standard of care for performance of work is to perform all work in accordance with the

standards prevalent in the community in which the project is being built, or some similar

standard. The purpose for providing an express standard of care in the contract is to take

advantage of those jurisdictions in which the economic loss rule bars a party from seeking

tort remedies where a contract between the parties expresses or implies a particular stan-

dard of care. Of course, the standard of care should be no more expansive than the standard

that would be implied by the law in the absence of any express statement thereof.


(10/07) 10-37

STIPULATED SUM CONTRACTS —

CONTRACTOR’S CONSIDERATIONS

Notes on Use: Contracts between owners and contractors are often divided between the

principal agreement itself, which contains the chief negotiated terms between the parties, and a

separate set of “standard” terms and conditions. The checklist below is focused on drafting the

terms of the principal agreement between the owner and the contractor. This checklist is intended

to be used in conjunction with “General Conditions — Contractor Considerations” to constitute a

complete review of the contract. To the extent that the contract price includes some elements that

are determined with reference to the cost of work, the checklist above should be consulted as well.

____ Identification of Owner

____ Determine the type of entity and the status of the owner’s registration with the

Secretary of State or other responsible business registration office.

____ Determine whether the owner is a governmental or quasi-governmental agency.

Special contracting rules may apply to such entities, and it may not be apparent

from the name of the entity whether or not the entity is a government agency.

____ Where appropriate, determine whether the owner is a subsidiary, parent, or other

affiliate of the real party in interest that has been created so as to shield the real

party in interest from liability.

____ Property Issues

____ Confirm that the owner with whom the contractor is contracting is the record

owner of the property.

____ Ensure that the property described in the contract as the location of the project is

described in sufficiently detailed legal terms to enable the contractor to file liens or

otherwise to utilize the property as security.

____ When the “owner” is a tenant, confirm the contractor’s ability to lien the property

— this may include ensuring that the owner of the property has consented to the

improvements or has not posted or otherwise protected the property against liens.

____ Contract Documents

____ Ensure that the enumeration of the contract documents includes all documents on

which the contractor has relied in agreeing to terms with the owner. Many con-

tracts are written in such a manner that the “Contract Documents” section includes

(or can be read as implying) a merger clause, under which all previous representa-

tions, promises, negotiations, and terms are merged into the written contract.


10-38 (10/07)

____ Assess the extent to which bid documents should be (or will be) included as part of

the final contract documents. Bid documents can add unexpected terms to the con-

tract, and should be reviewed in connection with the final contract to ensure consis-

tency. This is especially true with respect to government projects where an apparent

successful bidder has an opportunity to negotiate the terms of the contract.

____ Contract Time

____ Ensure that the stated date of completion is fixed from a stated or definable time of

commencement. If the time of commencement is to be fixed by the future issuance

of a Notice to Proceed, the contract should not state a specific date for completion.

By using a floating and indeterminate start date with a fixed date for completion,

the contractor could lose valuable working time.

____ Ensure that the contractor’s only time commitment is to complete the work by a

specified (or readily calculable) date. In particular, the contractor should not be

bound to adhere to a particular construction schedule. Any schedule should be fur-

nished only for the informational purposes of the owner and not as a promise to

perform in accordance either with the time limit set forth for particular tasks in the

schedule or in the sequencing of the work to be completed. By incorporating a

schedule into the contract documents without this clarification, the owner may

claim scheduling rights (and ownership of float) that the contractor wishes to

retain.

____ Ensure that the contract is clear that any “float” belongs to the contractor. Courts

have disagreed as to who is entitled to the benefit of additional or uncommitted

time in the schedule, and by leaving open the prospect that an owner can claim the

benefit of such additional time, the contractor loses potentially valuable accelera-

tion claims (or has its delay claims undercut).

____ Funding

____ Determine the sufficiency of the funding mechanism through which a private

owner intends to finance its project, and verify that the contract provides adequate

protection to the contractor in the event the owner is unable to finance the proper-

ty. This may include a pre-construction assessment of the value of the equity in the

property, financial disclosures or guarantees from the owner, or other means of

verifying financing.

____ When the owner is a government entity, research applicable finance and spending

limitations so as to ensure that adequate funding is committed for the project,

including funding mechanisms for any reasonable changes that may be made dur-

ing the course of construction. Many government entities are limited in the amount

of money they may commit to capital projects, either by spending limitations or by

laws that require pre-construction authorization of funding. A contractor’s failure

to recognize such funding limitations may put it in the position of facing barriers

to its collection of payment.


(10/07) 10-39

____ Scope of Work

____ When the contract price is fixed as a stipulated sum, many of the disputes that

arise concern whether work performed is inside or outside the scope of the con-

tract. Accordingly, scope of work provisions in stipulated sum contracts are gener-

ally of far greater importance and impact than scope of work provisions in cost-

plus contracts where the owner bears the ultimate cost of the project regardless of

the scope. Accordingly, the contractor should verify that the scope of work is pre-

cise, the plans and specifications are complete, and that the contract documents are

clear enough that disputes over what work is in the scope of work and what work

is outside the scope of work are not likely.

____ Material Price Escalation Clause

____ Include a material price escalation clause that permits the contractor to an increase

in the contract price for material price increases that are not reasonably anticipated

by the contractor. Such a clause is necessary, as courts may not be inclined to grant

relief on the basis of price increases absent truly extraordinary circumstances

unless the parties have specified in the contract an allowance for such increases.

____ Payments

____ Verify that the owner has accepted any proposed budget as the basis for payment

under a stipulated sum contract. Payments under a stipulated sum contract are gen-

erally based on percentage of completion, and the percentage of completion in turn

is often determined with respect to a schedule of values or other estimate. The

owner should acknowledge and verify in advance of execution of the contract that

the schedule of values provided by the contractor is acceptable and will serve as

the basis for payments. Absent such acknowledgement or verification, the owner

may be tempted to quibble over early work on the basis that the contractor has

front-loaded the contract by attributing unrealistically high values to early work.

____ Similarly, the owner should acknowledge independent review and acceptance of

the contractor’s itemized bid where appropriate. Pre-contract verification of the bid

will undercut not only disputes as to the value of work performed in connection

with payment applications, but it will also undercut subsequent arguments over

unit prices, unbalanced bids, etc.

____ Where payment is based on percentage of completion, the contractor may want to

include a provision allowing for payment in advance for materials stored on site

(although not yet incorporated into the work) as well as to secure payment for long

lead-time and specially manufactured goods that are not technically part of the

work but whose payment the owner should bear.


10-40 (10/07)

____ Differing Site Conditions

____ Ensure that the contract contains a “differing site conditions” clause. With some

limited exceptions, a contractor who undertakes to perform in accordance with

plans and specifications undertakes the risk of most site conditions. In order to

avoid this risk, the contract should include a clause that allows for an increase in

contract price and/or time in the event the contractor encounters site conditions

that differ materially from those ordinarily experienced in construction of that type

in the relevant geographic area, as well as for conditions that differ from those rep-

resented in any pre-construction documents such as soil reports.

____ Where an owner insists on a stipulated sum contract without a differing site condi-

tions clause, the contractor should ensure that its price and pre-construction inves-

tigation accommodate the fact that the contractor will bear all responsibility for

site conditions. There is nothing immoral about an owner’s insistence that a differ-

ing site conditions clause be deleted, especially in light of many owners’ desire to

have an absolutely guaranteed contract price. However, an owner’s insistence on

deletion of a differing site conditions clause should be priced to reflect the risk

involved.

____ Indemnification

____ Verify that the scope of the indemnification provided in the contract is legal under

state law. Many states bar indemnification in whole or in part, primarily where the

indemnitee seeks indemnification regardless of its own fault in causing the loss or

damage at issue. In some states, an illegal indemnification clause will void the

entire contract; in other states, a void indemnification clause may be stricken, leav-

ing the remainder of the contract enforceable. Finally, some states bar indemnifica-

tion provisions in government contracts only but allow enforcement of such provi-

sions in private contracts.

____ Ensure that the indemnification provision is mutual; that is, ensure that each party

has the obligation to indemnify the other for any losses the other suffers that are

caused by the indemnitor. Such cross-indemnification clauses need to be drafted

carefully, of course, so they do not effectively cancel each other out in the event of

a dispute.

____ Ensure that any indemnification obligation undertaken by the contractor is covered

adequately by the contractor’s insurance.

____ Where indemnification is required, the contractor may also request as a condition of

indemnification that defense against the alleged claim be tendered to the contractor

as a means of allowing the contractor to control both the risk of exposure and the

expense of providing a defense. When the contractor is required to bear the owner’s

cost of defense through separate counsel, such cost of defense may easily approach

the ultimate liability, making any defense on the merits ultimately ineffective.


(10/07) 10-41

____ Ensure that any indemnification right is conditioned on timely notice from the

owner of the claim being asserted.

____ Retainage. Although most contracts allow for the retention by the owner of a portion of the

contract price until substantial completion, many jurisdictions impose limitations on the

amount of retention that can be withheld by the owner. Any retainage set out in the contract

should be measured against applicable statutes to ensure consistency. In addition, ensure

that retention is released upon substantial completion, less any reasonable withholding nec-

essary to satisfy any punchlist obligations of the contractor.

____ Insurance. During the contracting process, it is likely that the owner will request status as a

primary insured or, at the very least, as an additional named insured. Verify that insurance

coverage as required by the contract is available and in place, and that any requested

endorsements have been procured. The contractor’s failure to procure required insurance

may expose the contractor to substantial additional damages.

____ Termination for Convenience. Ensure that the contractor is entitled to some compensation

for early termination for convenience by the owner. Ideally, the contractor would be entitled

to recover any profit it would have made on unfinished work. At the very least, the contrac-

tor should not be expected merely to recover its costs into the job before termination, as

such a term leaves the contractor subject to unreasonable risk of loss of its anticipated prof-

it.

____ Standard of Care. It may be advantageous in the agreement to specify that the contractor’s

standard of care for performance of work is to perform all work in accordance with the

standards prevalent in the community in which the project is being built, or some similar

standard. The purpose for providing an express standard of care in the contract is to take

advantage of those jurisdictions in which the economic loss rule bars a party from seeking

tort remedies where a contract between the parties expresses or implies a particular stan-

dard of care. Of course, the standard of care should be no more expansive than the standard

that would be implied by the law in the absence of any express statement thereof.


10-42 (10/07)

GENERAL CONDITIONS — CONTRACTOR’S CONSIDERATIONS

Notes on Use: This checklist is intended to guide the user in drafting the General

Conditions portion of a general contract. The project-specific terms will ordinarily be included in

a stipulated sum or cost-plus contract, and the reader should consult the Checklists related to each

of those contracts in conjunction with the drafting of the general contract.

____ Interpretation of Documents. In addition to a complete specification of the contract docu-

ments, the general contractor may wish to include a clause that ranks the documents by

order of priority in interpretation for the purposes of resolving any conflicts among the var-

ious contract documents.

____ Funding. Ensure that the contract provides that potential inadequacy of funding for future

work under the contract serves as a reasonable basis for insecurity concerning the owner’s

future performance under the contract. In addition, the contract should expressly provide

that the contractor may insist on adequate assurance of performance in the face of funding

concerns. The function of such a clause is to permit the contractor to declare an anticipatory

repudiation where such assurance is not forthcoming, and thereby to terminate the contract

prior to an actual breach. The importance of anticipatory repudiation where funding may be

inadequate is to allow the contractor to get out of the contract before finding itself exces-

sively committed to a project financially in which its likelihood of recovery is endangered.

____ Review of Plans and Specifications. Ensure that any obligation on the part of the contractor

to review plans and specifications in advance of the contract is solely for the purpose of the

contractor’s familiarizing itself with the work to be performed and does not constitute an

affirmation, warranty, or other obligation on the part of the contractor to guarantee the con-

structibility of the project or that the plans and specifications are error-free.

____ Site Investigation. Ensure that any site investigation required of the contractor only requires

the contractor to perform a “reasonable” investigation and does not have the effect of shift-

ing the risk of all subsurface conditions to the contractor. In a stipulated sum contract

where the owner refuses to include a differing site conditions clause in the contract, the

contractor’s obligation to conduct a pre-construction site investigation is much more a mat-

ter of the contractor’s prudence in accepting responsibility for site conditions and much less

a question of its contractual obligation to do so.

____ Coordination Among Multiple Primes

____ When the contractor is one of two or more prime contractors, the general contract

should specify in detail the precise manner in which the owner will coordinate

work among the different primes and should further identify each of the specific

tasks for which the owner is responsible under the general parameters of coordina-

tion. A general clause requiring the owner to accept responsibility for coordination

with a concomitant obligation on the part of each contractor to “cooperate” with

such coordination may be too general to resolve disputes over particular coordina-

tion tasks.


(10/07) 10-43

____ Price

____ Where the underlying contract price is calculated in whole or in part with respect

to unit prices, consider whether the contract should include adjustment of unit

prices where estimated quantities vary from the quantities that served as the basis

for the bid. Such a clause is necessary to protect the contractor’s pricing when

actual units are substantially fewer than the units bid.

____ Warranty Clauses

____ Disclaimer of Express or Implied Warranties. Ensure that all disclaimers of express

or implied warranties satisfy the state law requirements, and in particular satisfy

the Uniform Commercial Code. Although construction contracts are typically

regarded as service contracts rather than sale contracts, warranties related to indi-

vidual items within a project may be held to the UCC’s standards regarding dis-

claimer of warranties.

____ Transfer of subcontractor/manufacturer warranties: Ensure that subcontractor, sup-

plier, and materialmen warranties are transferred to owner upon completion of

project, and ensure that such transfer wholly satisfies any warranty obligation on

the part of the general contractor.

____ Limitation on Remedies

____ Legality. Ensure that any limitations on remedies are consistent with state law.

____ Mutuality. Ensure that the contractor is not exposed to consequential damages, for

example, while the owner is protected from consequential damages. Of course, it is

always nice for the contractor to have recourse to consequential damages while

limiting the owners, but as a practical matter the best the parties should hope for is

mutuality of their respective obligations.

____ “No Damages for Delay” Clause

____ Enforceability. Assess and advise contractor with respect to enforceability of a “no

damages for delay” clause, as the contractor should make a conscious business

decision as to the acceptability of such a clause in the face of its possible enforce-

ment. The numerous exceptions to the general enforceability of no damages for

delay clauses mitigates against their threat to the contractor, but ultimately the

acceptance of such a clause is a business decision and not a legal decision.

____ Informational Items Under Owner Control. Ensure that there are specific time commit-

ments on the part of the owner or the owner’s representative for the provision of responses

and other informational items exclusively within the owner’s control, such as responses to

requests for information (RFIs), submittals, and owners’ selections. A project can face sub-

stantial delays when these informational items are not returned in a timely manner, and

absent an express statement as to the owner’s obligation to return items within a specified

period, an allegation of delay can turn on a troubling “reasonable time” term implied by

the court.


10-44 (10/07)

____ Claims and Disputes. The issue of alternative forms of dispute resolution is addressed else-

where in these checklists; in the context of general conditions, however, ensure that what-

ever form of dispute resolution is selected by the parties, it permits the contractor to join

subcontractors to any dispute with the owner that arises out of work performed by the sub-

contractors. Absent such a provision, the contractor bears an unreasonable list of multiple

or inconsistent liabilities arising from the prosecution of different claims in different juris-

dictions (or before different tribunals). In addition, the segregation of disputes into resolu-

tion in different fora can be unreasonably expensive.

____ Time Limits on Claims: Many states will recognize and enforce, as a private statute of limi-

tations, a time limit stated under a contract for the purpose of making claims. In a jurisdic-

tion that recognizes such private statute of limitations, ensure that claims against the con-

tractor are limited by a provision that requires notice and pursuit of such a claim within a

reasonably short period.

____ Choice of Forum. Ensure that a choice of forum provision does not unreasonably burden

the contractor for resolution of the dispute. Choice of forum provisions are generally

enforceable, especially in the commercial context, and should not unduly hinder the con-

tractor from making or defending a claim.

____ Attorney Fees. At the very least, attorney fee clauses should provide mutuality; that is, the

contract should not permit only the owner to recover attorney fees in the event of a dispute

between the parties. More important, the contractor should bear the decision of whether to

include an attorney fee clause as a matter of business judgment.

____ Suspension. Ensure that the contractor is entitled to recover costs for any period of suspen-

sion by the owner. In particular, ensure that the suspension clause is harmonized with any

no damages for delay clause so that the contractor is not precluded from recovery.

____ Termination for Default. Ensure that any termination for default by the owner must be pre-

ceded by reasonable notice and an opportunity to cure. Termination itself is a dramatic rem-

edy whose invocation is discussed elsewhere in these checklists. At the very least, however,

the contractor should protect itself against a precipitous invocation of termination as a rem-

edy by ensuring that the contractor has the opportunity to remedy any asserted defects in

performance after due notice so as to allow some opportunity to mitigate against the dra-

matic and dire consequences of a termination.

____ Changes

____ Pricing of Directed Changes: Ensure that any pricing or default mechanism for the

pricing of directed changes in the face of a dispute is reasonable and does not put

the contractor at unnecessary risk of loss with regard to directed changes.

____ Ensure that the contractor is allowed to contest any “field order” or “no-cost

change order” where the owner reserves the right in the contract to order no-cost

changes to the contract.


(10/07) 10-45

____ Require the owner to make some partial payment with respect to directed changes

in circumstances in which the parties do not come to agreement as to the price of

the changes. Because most directed change clauses require the contractor to con-

tinue working even when the price of the change is in dispute, the contractor does

not want to leave itself in a vulnerable position in which it is required to perform

additional or changed work with no prospect of payment until an elaborate pricing

dispute resolution mechanism is completed.


10-46 (10/07)

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