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VI. Changes and Delays in Construction Projects...2018/06/11 · Changes and Delays in Construction...
Transcript of VI. Changes and Delays in Construction Projects...2018/06/11 · Changes and Delays in Construction...
VI. Changes and Delays in Construction Projects
Presented By: Martin J. Kenworthy Kenworthy Law, P.C. NBI Seminar: Construction Law from Start to Finish
Des Moines, Iowa June 6, 2018
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Martin J. Kenworthy is president of Kenworthy Law, P.C. Marty has been practicing law for 28 years and is licensed in the state and federal courts of Iowa, Ohio, Kentucky, and Florida and the United States Supreme Court. Marty holds a B.S. degree from Bradley University in Construction Engineering and worked in the industry for 8 years prior to beginning the practice of law in Cincinnati, Ohio. Marty’s practice includes business, commercial real estate and construction law. Specifically for construction matters, Marty represents public and private owners, design professionals, general contractors, sub-contractors and suppliers. Marty is also an arbitrator with the American Arbitration Association, primarily for construction matters.
www.kenworthylawpc.com
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The topics to be covered are:
A. Handling Change Orders
B. Documenting Changes and Extra Work
C. Delay: Excusable, Concurrent or Inexcusable
D. Deficient Plans or Specifications: Design vs. Performance
E. Damages
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A. HANDLING CHANGE ORDERS
What is a change order?
Contract Scope of Work:
The construction contract should include a “scope of work” provision. The
defined “scope of work” serves as the basis for the contractor to assert it will be required
to perform work beyond, or different from, that specified in its contract.
Requirement of a Writing
Almost all construction contracts include a requirement stating that material
changes, alterations or deviations must be ordered in writing to be valid and binding upon
the parties. Failure of a contractor to follow such process serves as a frequent basis of a
defense by an owner.
Change Orders in General
A change order is the written agreement which provides that the owner,
architect/engineer, and contractor agree on a change in the work and the degree to which
the contract time and price will be adjusted. Purpose of the written instrument:
• Parties on the project are on notice of the change
• Establishes the cost and/or time change
• Is adopted in accordance with the contract
Authorization of a Change Order:
Important to know what individuals/governing authority must agree to change
orders – important for all projects, but when dealing with public authorities must be sure
there is proper approval.
Exceptions to the Written Change Order Requirement:
• Quantum Meruit
An equitable remedy that for a contractor to claim the cost of labor,
services, and materials provided there is no specific contract covering the work.
To pursue such a claim, the threshold question is whether the alleged extra
work was required of the contractor by the original agreement.
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Under Iowa law, “[a]n express contract and an implied contract cannot co-
exist with respect to the same subject matter, and the law will not imply a contract
where there is an express contract.” Scott v. Grinnell Mut. Reinsurance Co., 653
N.W.2d 556, 561 n.2 (Iowa 2002) (quoting Giese Constr. Co. v. Randa, 524
N.W.2d 427, 431 (Iowa Ct. App. 1994)). “As a general rule in Iowa one who
pleads an express contract cannot ordinarily recover upon an implied contract or
quantum meruit.”
• Waiver
Iowa Civil Jury Instructions provide:
2400.11 Waiver of Performance. The right to insist on performance can
be given up. This is known as a “waiver.” A waiver may be shown by actions, or
you may conclude from (name)’s conduct and the surrounding circumstances that
a waiver was intended. The essential elements of a waiver are the existence of a
right, knowledge of that right, and an intention to give it up.
Frequently, the claim is made that the owner dispenses with the written
change order requirement with full knowledge of the material facts and does so
resulting in the argument that it is unjust to rely upon the strict provisions of the
contract to deny payment to the contractor.
“Generally, a builder may recover for extra work performed on a
construction project when ordered and agreed to by the parties and not covered by
the building contract.” Serv. Unlimited, Inc. v. Elder, 542 N.W.2d 855, 857 (Iowa
Ct. App. 1995). Although a contract may require written change orders, this
requirement may be waived by the parties. Cent. Iowa Grading, Inc. v. UDE
Corp., 392 N.W.2d 857, 860 (Iowa Ct. App. 1986).
• Oral Change Order
In some jurisdictions it is very difficult to overcome a contract’s written
change order requirement. A “clear and convincing” standard may apply in some
states. Other states may consider the circumstances and follow a preponderance
of the evidence standard. Maryland, Nebraska, and Massachusetts may require
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less than a clear and convincing standard to prove a change order. A Nebraska
court has held that the practice of ignoring written change order requirements will
serve to modify the contract that would otherwise bar recovery by a contractor
who does not obtain a written change order.
Courts will often consider the course of conduct between the parties
leading up to the oral change orders. If the owner and the contractor routinely
disregarded the contract’s change order provision in the past, or the owner
previously requested and paid for extra work without written change orders, then
courts tend to hold that the contract’s change order provision was nullified.
“Proof of a claimed oral contract must be ‘by evidence which is clear,
satisfactory and conclusive, and not by loose and random conversations.’ …
‘A mere preponderance of the evidence is not sufficient’ to prove an oral
contract.” Wagner Enterprises v. John Deere Shared Services, 397 F.Supp.2d
1097, 1105 (N.D. Iowa, 2005) (citations omitted) (Emphasis added).
“To prove the existence of an oral contract, the terms must be sufficiently
definite for a court to determine with certainty the duties of each party, the
conditions relative to performance, and a reasonably certain basis for a remedy.”
Wagner at 1105.
In Ziskovsky v. Ziskovsky, No. 3-1062 p. 9 (Iowa App. 2014) the court
provided: “The oral modification lacks ‘objective evidence’ from which we can
ascertain the definite terms of the modification. The oral agreement appears to be
largely based on ‘loose conversations’ between Vernon and Dwane. The district
court correctly reasoned, ‘[I]t is clear that no meeting of the minds occurred on
the terms and conditions of the agreement between the parties because none of the
three living parties to the contract could articulate exactly what the terms agreed
to by the parties were.’”
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B. DOCUMENTING CHANGES AND EXTRA WORK
Claim Notice
The construction law treatise by Philip Bruner and Patrick O’Connor summarizes
the value of notice provisions as follows:
Timely notice of claims is a matter of fundamental fairness. Fairness
inherent in timely notice permits the recipient of the notice to: (1) assess the
implications and potential liability that may be created; (2) investigate whether
the claimed item truly is “extra” to the original contractual undertaking; (3)
document costs incurred in performance of the extra work; and (4) fairly adjust
the contract price before memories fade, documents are lost and the facts recede
into the “construction haze.” 1 Bruner & O’Connor Construction Law § 4:35
(2002).
Example Notice Provisions:
AIA A201
§ 3.7.4 Concealed or Unknown Conditions
If the Contractor encounters conditions at the site that are (1) subsurface or
otherwise concealed physical conditions that differ materially from those
indicated in the Contract Documents or (2) unknown physical conditions
of an unusual nature that differ materially from those ordinarily found to
exist and generally recognized as inherent in construction activities of the
character provided for in the Contract Documents, the Contractor shall
promptly provide notice to the Owner and the Architect before conditions
are disturbed and in no event later than 14 days after first observance of
the conditions. The Architect will promptly investigate such conditions
and, if the Architect determines that they differ materially and cause an
increase or decrease in the Contractor’s cost of, or time required for,
performance of any part of the Work, will recommend that an equitable
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adjustment be made in the Contract Sum or Contract Time, or both. If the
Architect determines that the conditions at the site are not materially
different from those indicated in the Contract Documents and that no
change in the terms of the Contract is justified, the Architect shall
promptly notify the Owner and Contractor, stating the reasons. If either
party disputes the Architect’s determination or recommendation, that party
may submit a Claim as provided in Article 15.
§ 15.1.3.1 Notice of Claims
Claims by either the Owner or Contractor, where the condition giving rise
to the Claim is first discovered prior to expiration of the period for
correction of the Work set forth in Section 12.2.2, shall be initiated by
notice to the other party and to the Initial Decision Maker with a copy sent
to the Architect, if the Architect is not serving as the Initial Decision
Maker. Claims by either party under this Section 15.1.3.1 shall be
initiated within 21 days after occurrence of the event giving rise to such
Claim or within 21 days after the claimant first recognizes the condition
giving rise to the Claim, whichever is later.
SUDAS: Section 1040 1.10 (A)(1):
In any case where the Contractor believes extra compensation is due for
work or material beyond the scope of the work under the contract and not
ordered by the Engineer as extra work as defined herein, the Contractor
shall notify the Engineer in writing of its intention to make claim for such
extra compensation before beginning the work on which the claim is
based. The Contractor shall not proceed with that work until the
Contractor and the Jurisdiction have executed a change order with respect
to extra compensation.
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Example of detailed claim notice requirement:
General Conditions for Washington State Facility Construction. Each claim must
include:
1. Factual statement of Claim: A detailed factual statement of the Claim for
additional compensation and time, if any, providing all necessary dates, locations,
and items of Work affected by the Claim;
2. Dates: The date on which facts arose which gave rise to the Claim.
3. Owner and A/E employees knowledgeable about Claim: The name of each
employee of Owner or A/E knowledgeable about the Claim;
4. Support from Contract Documents: The specific provisions of the Contract
Documents which support the Claim;
5. Identification of other supporting information: The identification of any
documents and the substance of any oral communications that support the Claim;
6. Copies of supporting documentation: Copies of any identified documents, other
than the Contract Documents, that support the Claim;
7. Details on Claim for Contract Time: If an adjustment in the Contract Time is
sought: the specific days and dates for which it is sought, the specific reasons
Contractor believes an extension in the Contract Time should be granted; and
Contractor’s analysis of its Progress Schedule to demonstrate the reason for the
extension in Contract Time;
8. Details on Claim for adjustment of Contract Sum: If an adjustment in the Contract
Sum is sought, the exact amount sought and a breakdown of that amount into the
categories set forth in, and in the detail as required by Section 7.02; and
9. Statement certifying Claim: A statement certifying, under penalty of perjury, that
the Claim is made in good faith, that the supporting cost and pricing data are true
and accurate to the best of Contractor’s knowledge and believe, that the Claim is
fully supported by the accompanying data, and that the amount requested
accurately reflects the adjustment in the Contract Sum or Contract Time for which
Contractor believes Owner is liable.
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Some best practices:
The contractor should not stop working. Contracts typically require a contractor to
proceed with performance of ordered work pending any disputes over adjustments to the
schedule and the contract price. As a general rule, a contractor’s unexcused refusal to
perform constitutes a material breach of a contract. See, e.g., 1 Bruner & O’Connor
Construction Law § 4:49.
The contractor should give notice right away. If it is not clear whether the owner
has “ordered” a particular change, it is advisable for the contractor to provide notice to
the owner that it deems a set of circumstances as calling for extra work. See 1 Bruner &
O’Connor Construction Law § 4:41. Notice allows the owner to consider whether a
change has occurred. If the owner directs the contractor to proceed with the work after
such notice, a constructive change order may be deemed to have been issued in the
absence of a formal change order. Id.
The contractor should document the change. Where contracts require written
orders before changes that may affect the contract price or schedule, contractors should
attempt to obtain a written order before proceeding with the changed work. If the
contractor does not do that, they should document communications and the directives
they are given so they can later establish the potential waiver of the contract’s
requirements for written change orders.
Cases regarding change orders:
In Ida Grove Roofing v. City of Storm Lake, 378 N.W.2d 313 (Iowa Ct. App.
1985), a contractor encountered different conditions on a roof replacement project than
anticipated and it sought additional compensation after completing the work. The
contractor asserted that it bid on faulty plans and specifications which did not properly
disclose the thickness of roof insulation to be removed. The contractor also asserted that
it was told by the owner and the architect that the conditions would improve as the work
continued. There was evidence that the owner’s representative was told by the contractor
that it would seek additional compensation when the different conditions were
encountered, but the court held that even if that was true, a change order was required
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before additional compensation would be allowed. The contractor did not stop work and
seek a change order, but told the engineer additional compensation would be sought. “In
this case the contractor did not stop work and obtain a change order after he reached the
third section of the roof and found it was not in better condition that the lower sections.
We find that without plaintiff’s compliance with the change order, the court was correct
in denying the claim for additional compensation.” Id. at 315.
In another Iowa roofing case, T & K Roofing & Sheet Metal Co. v. Rockwell
Collins, 2006 WL 1009015 (Iowa Ct. App. 2006), the court adopted the holding from Ida
Grove when it upheld the denial of the contractor’s claim for additional compensation.
T & K Roofing claimed that when bidding it relied on the specifications regarding what
type of roofing material was present. When it encountered different conditions than
expected it sought a change order for additional labor, but the owner denied the change.
“The key to ‘the sufficiency of a writing as a change order is whether there was approval
of additional compensation by the owner.’” T & K at 2 (citing Ida Grove at 315,
emphasis in original). Because the owner had not approved the change order the claim
was denied.
In Jack Eherenman d/b/a Eherenman Construction, v. John M. Warren and
Sandra L. Warren, No. 13746 (Iowa Ct. App. December 24, 2014), the court held:
The district court essentially found a waiver. According to the court,
Eherenman received verbal directions from all members of the family.
The court characterized these directions as work order changes, “which
caused Eherenman Construction, on occasions, to tear out existing work
and re-do that same work solely to comply with a new work directive
received from one or more of [them.]” The court determined Eherenman
was more credible than the Warrens on this issue. We give weight to this
credibility finding because “the trial court is in a more advantageous
position than we to put credence where it belongs.” Flynn Builders, 814
N.W.2d at 545. This is particularly true where the court’s findings are
supported by extensive record evidence.
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Eherenman testified he discussed changes with the family by phone and
e-mail. Verbal or unsigned change orders were paid “about half a dozen”
times, “at least.” Eherenman cited an unsigned order to remove the
fireplace, which was billed and paid by Sandra Warren. According to
him, billings were submitted to the Warrens “[p]robably every week or
two, maybe three weeks, . . . certain invoices would come as the draws
were needed, so as we would get things done.” With respect to change
orders, Eherenman testified “if that work would be completed, then I
would invoice out for that.” Because the Warrens waived the right to have
all changes approved by written change order, Eherenman was entitled to
compensation for work performed outside the four corners of the contract
or the signed paragraphs of the written change order.
Cases from outside Iowa have followed the same analysis as Ida Grove and
T & K. The case of Cameo Homes v. Kraus-Anderson Construction Company, 394 F.3d
1084 (8th Cir. 2005), involved claims for alleged extra work by Cameo Homes. The
contract between Cameo Homes and the owner included a change order process and a
claims process. Written notice of claims had to be provided to the architect within 21
days of the event giving rise to the claim or otherwise the contractor would be precluded
from litigating the claim. Cameo did not follow the claims process but instead filed suit.
Cameo argued that the parties had modified the process through a course of dealing and
that change order requests it had given to the construction manager satisfied the written
notice requirements under the contract. The court found that the requirement that Cameo
give written notice to the architect was a condition precedent to it bringing suit and it
therefore barred the claims. “Cameo has not shown that the parties understood that its
submission of change order requests to Kraus-Anderson was effectively equivalent to
submission of claims to the architect. … Cameo failed to give written notice to the
architect of its breach of contract claims against the City as required by the contract. … It
is therefore contractually barred from bringing them here.” Id. at 1087-1088.
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The process for submitting written claims is not a minor, insignificant detail of the
contract between the parties. This is especially important when the owner is a public
entity. As provided by one court: “The purpose for the prompt written notice
requirements found in both the changed conditions clause and the change of contract
price provision is to permit the government’s early investigation into the validity of the
claim and the contractor’s resulting costs so the government may retain control of the
total contract price and weigh competing alternatives to excessive expenditures.” Dan
Nelson Construction, Inc. v. Nodland & Dickson, 608 N.W.2d 267, 274 (N.D. 2000).
Basis for Extra Work Claim
• Implied Warranty of Complete and Accurate Contract Documents
Design specifications come with an implied warranty that if they are followed, the
contractor can produce an acceptable result. United States v. Spearin, 248 U.S.
132 (1918). The Court provided:
[I]f the contractor is bound to build according to plans and
specifications prepared by the owner, the contractor will not be
responsible for the consequences of defects in the plans and
specifications. This responsibility of the owner is not overcome by
the usual clauses requiring builders to visit the site, to check the
plans, and to inform themselves of the requirements of the work …
“[T]he insertion of the articles prescribing the character,
dimensions and location of the sewer imported a warranty that, if
the specifications were complied with, the sewer would be
adequate. … The breach of warranty … [made the Government]
liable for all damages resulting from its breach.
Id. at 137.
An owner is expected to provide the contractor with complete and accurate
contract documents. Extra work required to correct deficiencies from inadequate
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plans or specifications must be paid for by the owner as either a breach of the
implied warranty, or as a breach of a statutory duty or common law.
In Midwest Dredging Co. v. McAninch Corp., 424 N.W.2d 216 (Iowa 1988) the
Iowa Supreme Court held as follows:
In allocating that risk, courts have universally applied a rule first
expounded in a line of Supreme Court cases. The rule provides
that the government is not liable to a contractor for breach of
implied warranty unless it misrepresents material facts through
concealment or false statements. … In essence, this rule
establishes that no implied warranty will arise when the
government, in good faith, presents all of the information it has on
subsurface conditions to the contractor. Id. at 222.
The court also relied on the following statements from Spearin:
[T]he insertion of the articles prescribing the character, dimensions
and locations of the sewer imported a warranty that if the
specifications were complied with, the sewer would be adequate.
This implied warranty is not overcome by the general clauses
requiring the contractor to examine the site, to check up the plans,
and to assume responsibility for the work until completion and
acceptance. The obligation to examine the site did not impose upon
him the duty of making a diligent inquiry into the history of the
locality with a view to determining, at his peril, whether the sewer
specifically prescribed by the government would prove adequate.
The duty to check plans did not impose the obligation to pass upon
their adequacy to accomplish the purpose in view.
Lastly, relying on other authority, the court provided:
[G]eneral exculpatory clauses which disclaim any responsibility
for the accuracy of that data have been held to be of no effect when
the positive specifications made by the government were obviously
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intended to be used by the bidding contractors in formulating their
bids. Id. at 222.
• Implied Warranty of Accurate and Complete Bidding Information (Non-
disclosure of Material Facts)
The implied warranty that bidding information is accurate and complete is
found in Hollerbach v. U.S. 233 U.S. 165 (1914). The contractor alleged the
existing conditions were misrepresented in the bidding documents. The court
held:
[T]he specifications spoke with certainty as to a part of the
conditions to be encountered by the claimants. … this positive
statement of the specifications must be taken as true and binding
upon the Government … [U]pon it rather than upon the claimants
must fall the loss resulting from such mistaken representations. …
Id. 233 U.S. at 172.
“[A] contractor must prove the following elements by clear and
convincing evidence to recover additional compensation for extra work on a
construction contract: (1) the work was outside the scope of the construction
contract; (2) the extra items were ordered by the owner; (3) the owner agreed to
pay extra, either by his words or conduct; (4) the extras were not furnished by the
contractor as his voluntary act; and (5) the extra items were not rendered
necessary by any fault of the contractor.” 209 N. Walnut, L.L.C. v. Origin Fire
Prot., Inc., 2013 IL App (2d) 120831-U, ¶ 29 (citing A.W. Wendell & Sons, Inc. v.
Qazi, 254 Ill.App.3d 97, 104 (1993)).
“The contractor sustains this burden by proving that the extra work was
requested by the owner, and there is no evidence indicating that the work was
necessary or voluntarily performed due to fault by the contractor.” 209 N.
Walnut, L.L.C. v. Origin Fire Prot., Inc., 2013 IL App (2d) 120831-U, ¶ 29(citing
A.W. Wendell & Sons, Inc. v. Qazi, 254 Ill.App.3d 97, 104 (1993)).
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C. DELAY: EXCUSABLE, INEXCUSABLE OR CONCURRENT
Excusable and Inexcusable Delays
The construction contract usually includes a provision to determine if a delay is
excusable or not. Excusable delays are delays that result from events that are beyond the
contractor’s control such as: acts of God (force majeure); unanticipated severe weather;
unanticipated site conditions; design errors; labor disputes/strikes; and owner-directed
change orders. If these types of delays are encountered, the contract completion time
may be extended without compensation to the owner. Excusable delays may be further
clarified either as compensable or non-compensable as discussed below.
Inexcusable delays are delays caused by events that are within the control of the
contractor. Examples of these types of delays include: delays caused by anticipated
weather conditions; improper scheduling by the contractor; inadequate workforce; poor
supervision; and delays from defective work. These delays are often times compensable
to the owner by the payment of either liquidated damages or actual damages by the
contractor.
Compensable/Non-Compensable Excusable Delays
• An excusable, compensable delay is a delay solely caused by the owner or
its consultants and not caused by the contractor. The contractor may be
entitled to additional time to substantially complete the project and, based
upon the contract, additional compensation. Such delay could be the result
of: owner initiated changes; differing site conditions; design changes/error;
or other actions that are within the owner or its representatives’ control.
In the case of excusable, compensable delays, a contractor may be
compensated by the owner in the payment of additional money to the
contractor to cover its additional costs and overhead incurred as a result of a
longer project duration. Contractors can agree to make a compensable delay
a non-compensable one by waiving their right to delay damages in exchange
for an extension of time, and generally such waivers are valid. Mars
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Associates, Inc. v. City of New York, 70 A.D. 2d 839, 418 N.Y.S.2d 27 (1st
Dep’t 1979).
• Non-compensable excusable delays are delays to the project schedule but
are within the parties’ contemplation and not the fault of either party. These
include delays caused by: severe weather; other acts of God; and possibly
labor disputes. Such delays are beyond the control of the parties and,
therefore, neither should be compensated nor penalized. Although the
contractor is not entitled to extra compensation for non-compensable delays,
in most instances, it is entitled to an extension of the contract time.
• The contractor claiming excusable delay has the burden of proving the
delay. See R.P. Wallace, Inc. v. U.S., 63 Fed.Cl. 402, 409 (Fed.Cir. 2004)
(“The contractor must prove that the excusable event proximately caused a
delay to the overall completion of the contract, i.e., that the delay affected
activities on the critical path.”). Accordingly, it is important that the
contractor document the cause of the delay including how the delay
impacted its critical path, and provide timely notice under the contract
regarding the event causing the delay.
Inexcusable Delay – Compensation to Owner
In the case of inexcusable delays, the owner may be compensated by the payment
of damages incurred as a result of the delays. Often actual damages are difficult (if not
impossible) to calculate, and many construction contracts include a liquidated damages
provision. A liquidated damages provision allows the owner to be paid a sum certain for
each day a project is completed after the agreed upon project completion date.
Liquidated damages are discussed further in the Damages section below.
If the owner includes a liquidated damages provision in the contract, it must be
able to establish that the liquidated damages amount is reasonable and not generally
disproportionate to the actual loss or injury to be sustained in the event of delay.
Otherwise, a court may deem the liquidated damages clause to be void as an
unenforceable penalty. Rohauer v. Little, 736 P.2d 403 (Colo. 1987). If the liquidated
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damages provision is not enforced, the owner may still be entitled to recover its provable
actual damages.
Concurrent Delays
Concurrent delays occur when both parties bear some of the responsibility for the
construction delays or when there are multiple delays that occur during the same time
period. When both parties are at fault, most courts find that neither party is entitled to
damages. Courts may be willing to add time for the completion of the project. When
concurrent delays are experienced, the owner and the contractor each bear their own
costs resulting from the delay and may not seek recovery against each other.
Case Law Concerning Concurrent Delay
• In Blinderman Construction Co v. The United States, 695F.2d 552 (Fed. Cir.
1982) the contractor sought additional compensation and a time extension
regarding alleged delays to the completion date. The contract provided that an
adjustment should be made to the contract price for any increase in costs
caused by suspension, delay, or interruption by the government, but that “no
adjustment shall be made under this clause for any suspension, delay, or
interruption to the extent (1) that performance would have been so suspended,
delayed, or interrupted by any other cause, including the fault or negligence of
the Contractor or (2) for which an equitable adjustment is provided for or
excluded under any other provision of this contract.” The Court found that the
contractor contributed to the delays and held that:
“Where both parties contribute to the delay “neither can recover
damage, unless there is in the proof a clear apportionment of the delay
and the expense attributable to each party.” Coath & Goss Inc. v.
United States. 101 Ct.Cl.702, 714-15 (1944); Commerce International
v. United States. 167 Ct.CJ.529, 338 F.2d.81, 90 (1964).” Id. at 559.
The Court further provided:
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“Generally, courts will deny recovery where the delays are “concurrent
or intertwined” and the contractor has not met its burden of separating
its delays from those chargeable to the Government.” Id. at 559.
Accordingly, no damages are recoverable where apportionment is not
possible, but an extension of time can be granted in such a case.
• Greg Opinski Construction, Inc. v. City of Oakdale, 199 Cal. App. 4th 1107,
132 Cal. Rptr. 3d, 170 Court of Appeal, Fifth District, California (Oct. 6,
2011).
A contractor defended the imposition of liquidated damages by arguing that
the city had actually delayed the project. The court held otherwise:
“If the contractor wished to claim that it needed an extension of time
because of delays caused by the City, the contractor was required to
obtain a written change order by mutual consent or submit a claim in
writing requesting a formal decision from the engineer. It did neither.
The court was correct to rely on its failure and enforce the terms of the
contract. It makes no difference whether Opinski’s timely performance
was possible or impossible under the circumstances. The purpose of
[these] contract provisions … is to allocate to the contractor the risk of
delay costs – even for delays beyond the contractor’s control – unless
the contractor follows the required procedures for notifying the owner
of its intent to claim a right to an extension.”
. . .
“[The] City was entitled to liquidated damages for [the] general
contractor’s late completion under the construction contract, even if
the delays were caused by the City’s conduct, where the contract
required any extension of time to be obtained through certain
procedures, and [the] general contractor did not use such procedures.”
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Key Contractual Provisions Regarding Delay
Owners and contractors should consider the various time-related provisions in
their contract. In addition to the time for completion and liquidated damages provisions,
“time is of the essence,” “no damages for delay,” “waiver of consequential damages,”
“acceleration” and “termination” provisions should be considered. Inclusion of the “time
is of the essence” clause can establish each of the other time related clauses as material to
the contract. Kole v. Parker Yale Dev. Co., 536 P.2d 848 (Colo. App. 1975). Without a
“time is of the essence” provision, the other time and delay provisions may be deemed
immaterial.
Form Contract Provisions Regarding Delay
Based on AIA A201:
8.3 DELAYS AND EXTENSIONS OF TIME
§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress
of the Work by an act or neglect of the Owner or Architect, or of an employee of
either, or of a separate contractor employed by the Owner; or by changes ordered
in the Work as reflected in Change Orders approved by the Owner that provide
for the Contract Time to be extended; or by unavoidable delay as defined in
Section 8.3.4, then the Contract Time shall be extended by Change Order for
such reasonable time as is necessary to account for the impact of the delay on the
progress of the Work.
§ 8.3.2 Claims relating to time shall be made in accordance with applicable provisions
of Article 1 5.
§ 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by
either party under other provisions of the Contract Documents.
§ 8.3.4 For purposes of Section 8.3.1, “unavoidable delay” means only the following:
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.1 abnormally inclement weather, earthquake, flood, cloudburst, cyclone,
tornado, or other cataclysmic phenomenon of nature beyond the power of the
Contractor to foresee and defend against;
.2 acts of the federal, state, or local government;
.3 acts of a public enemy, including fires, explosions, chemical or
biological acts;
.4 acts of the Owner, including changes to the Work;
.5 actions of separate contractors or utility owners performing work on
the Project;
.6 late delivery of materials resulting from strikes, lock-outs, freight
embargoes, government acts, or sudden disaster of nature beyond the power
of the Contractor or supplier to foresee or forestall; or
.7 any other cause that the Contractor could not reasonably foresee at
the time it contracted, did not have the power to control or prevent, and
that occurs with no fault or negligence on the part of the Contractor or
anyone for whom the Contractor is liable.
§ 8.3.5 The Contractor shall not be entitled to an extension of the Contract Time
or additions to the Contract Sum for delays attributable to causes other than
those listed in Section 8.3.4, including without limitation, the following:
.1 commonly occurring conditions such as time for curing concrete,
drying of paint, and other foreseeable construction-related time
requirements;
.2 failure to provide sufficient forces and equipment to maintain
satisfactory progress;
.3 late or slow delivery of materials from the supplier or fabricator
when the material was available in warehouse stock, or when delivery was
delayed by reasons of late ordering, financial considerations, or other
causes within the power of the Contractor to avoid ; and
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.4 plant or equipment failure of less than four hours duration or of any
duration due to the Contractor’s failure to provide and maintain the
equipment in good mechanical condition, or to provide for immediate
emergency repairs.
D. DEFICIENT PLANS OR SPECIFICATIONS: DESIGN VS.
PERFORMANCE SPECIFICATION
Specifications are typically either design or performance. Design specifications
state explicitly how a contract is to be performed and permit no deviation. Stuyvesant
Dredging Co. v. United States, 438 F.2d 1576, 1582 (Fed. Cir. 1987). Design
specifications come with an implied warranty that if they are followed, the contractor can
produce the desired result. United States v. Spearin, 248 U.S. 132 (1918).
On the other hand, performance specifications specify the results to be obtained,
and leave to the contractor the responsibility of determining how to achieve the end
results. They do not come with any warranty. J.L. Simmons Co. v. United States, 412
F.2d 1360, 1362 (Ct. Cl. 1969).
“Design specifications explicitly state how the contract is to be performed and
permit no deviations. Performance specifications, on the other hand, specify the results
to be obtained, and leave it to the contractor to determine how to achieve those results.”
Martin K. Eby, 436 F.Supp.2d at 1308, n.47 (internal quotations and citation omitted).
Spearin
In Spearin, the Supreme Court held that “[t]his implied warranty [of the adequacy
of the plans and specifications] is not overcome by the general clauses requiring the
contractor to examine the site, to check the plans, and to assume the responsibility for the
work until completion and acceptance.” U.S. v Spearin, 248 U.S. at 137. The Court’s use
of the term “general clauses” suggests that specific clauses may shift the design
responsibility to the contractor. Courts may enforce specific contract terms that shift the
consequences and risk of design defects to contractors if the terms are unambiguous.
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If a provision expressly disclaims the owner’s responsibility for owner supplied
information, it may be upheld. The court in McDevitt v. Marriott, 713 F. Supp. 906 (E.D.
Va. 1989), aff’d in part, rev’d in part on other grounds, 911 F.2d 723 (4th Cir. 1990),
upheld a provision expressing disclaiming “any responsibility [of the owner] for the data
[in a soil report] as being representative of the conditions and materials which may be
encountered.”
When Does Spearin Apply?
The courts have “held that a Spearin-type warranty is implied only in design
specifications, not in performance specifications.” Lopez v. A.C. & S., Inc., 858 F.2d 712,
716 (Fed.Cir.1988). See Martin K. Eby Const. Co., Inc. v. Jacksonville Transp.
Authority, 436 F.Supp.2d 1276, 1308 (M.D. Fla. 2005) (“The purpose of the Spearin
doctrine is to allow contractors to recover when the government [owner] does not fulfill
the responsibility it has undertaken in preparing and supplying design specifications.”)
When the specifications are “performance” in nature, there is no government
liability, absent a finding that the government’s performance standards against which the
design is measured were impossible or commercially impracticable to meet.
Intercontinental Manufacturing Co., Inc. v. United States, 4 Cl. Ct. 591 (1984).
Once the specifications are characterized as design specifications, then the contractor
“must show by a preponderance of the evidence that [the alleged design defect] was the
most probable cause [for deficient performance] when considered with reference to other
possible causes.” Ordnance Research, Inc. v. United States, 609 F.2d 462, 479-80
(Ct.Cl.1979)
Contractor’s Duty of Reasonable Reliance
Before a contractor can rely on the Spearin doctrine it must demonstrate
reasonable reliance on the plans and specifications. A contractor’s reliance on the plans
and specifications is not reasonable when it has prior knowledge of the defects or it fails
to comply with the plans and specifications.
A contractor’s reliance upon the plans and specifications is not reasonable if the
design defect was so “glaring or obvious” that an ordinary contractor would have found it
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during bid preparation or before performance. A contractor has an implied duty to seek
clarification of a patent ambiguity before submitting its bid or beginning performance.
Graham Constr. Co., Inc. v. Earl, 362 Ark. 220 (2005).
Reasonable reliance may also be lacking if the contractor discovered or should
have discovered a defect in the plans and specifications during its site inspection. Failing
to conduct a pre-bid site inspection will preclude a contractor from reasonably relying on
defects in the plans and specifications that an ordinary contractor would have discovered
had it conducted the reasonable site inspection. Stuyvesant Dredging Co. v. United
States, 834 F.2d 1576 (Fed. Cir. 1987).
The Design Defect Must be Fundamental
Drawings that require repeated clarification is not necessarily an indication that
the drawings are defective. “The [owner’s] documents must be substantially deficient or
unworkable in order to be considered a breach of the contract. If there are many errors or
omissions in the specifications, the [owner] breached the contract if the cumulative effect
or extent of these errors was either unreasonable or abnormal taking into account the
scope and complexity of the project. . . . To prove that the plans [are] defective, it [must
be shown] that the plans were unworkable.” Caddell Constr. Co., Inc. v. United States,
78 Fed. Cl. 406, 413-415 (2007).
How many errors are enough? In Dugan & Meyers Construction Co. v. Ohio
Dept. of Administrative Services, 113 Ohio St. 3d 226 (2007), the Ohio Supreme Court
denied the contractor’s Spearin claim despite evidence of the inadequacy of the plans and
specifications that included untimely owner responses to hundreds of requests for
clarification and field work orders. The contract included a “no-damages-for-delay”
clause that limited the contractor’s damages to the remedy specified in the contract – an
extension of time.
Can the Specification Be Both?
In Fruin-Co/non Corp. v. Niagara Frontier Transportation Authority, 180 A.D.2d
222, 229, 585 N.Y.S.2d 248 (N.Y. App. Div. [4th Dep’t] 1992), the owner argued that the
contractual requirement that two new subway tunnels be “watertight” was a performance
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specification and that no implied warranty applied to the specifications. The court
disagreed, and held it was necessary to view the contract – at least the portion concerning
the shell to the subway tunnels – as a whole in order to determine the degree of discretion
the contractor was afforded to achieve watertight-ness. The court found that the
specifications provided no discretion to the contractor as to how to construct the shell.
Even though watertight-ness had to be achieved, the court held that the language was a
design specification. That would include an implied warranty from the owner that, so
long as the design specifications were followed, the contractor has no responsibility for
the ultimate success of the design. The contractor would be permitted to recover
compensation for extra work required to address the leaks.
E. DAMAGES
Liquidated Damages Provision
Owners frequently include (or a contractor in its subcontracts) a liquidated
damages provision for unexcused delays. Generally, it will be a per diem rate for each
day of project delay. Such provisions provide an express allocation of damages
associated with construction disputes, identify expectations for all parties, and lessen the
evidence which may be necessary to establish damages.
A key legal issue is whether the provision for damages is a valid liquidated
damages provision or an unenforceable penalty clause. Many courts have addressed the
issue – there is no litmus test. Generally, each one must be evaluated by its own facts and
circumstances. Some courts follow the Restatement (Second) of Contracts (1981), section
356, which provides as follows:
damages for breach by either party may be liquidated in the agreement
but only at an amount that is reasonable in the light of the anticipated or
actual loss caused by the breach and the difficulties of proof of loss. A
term fixing unreasonably large liquidated damages is unenforceable on
ground of public policy as a penalty. United States v. Bethlehem Steel
Co., 205 U.S. 105 (1907).
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Liquidated damages provisions should be a reasonable approximation of the
actual anticipated damages from the loss of use of the project. In reviewing if the amount
fixed as liquidated damages are actually approximates of anticipated losses, courts look
to when the parties made the contract, not when the contract was breached. Restatement
(Second) of Contracts § 356 cmt. B, at 158 (1981). Another key factor that is considered,
is whether or not the proof of actual loss would be difficult to establish. Grossinger
Motorcorp v. Am. Nat’l Bank & Trust Co., 240 Ill. App. 3d 737, 607 N.E.2d 1337 (1992).
Rohlin Case
A leading Iowa case frequently cited on the issue of liquidated damages is Rohlin
Constr. Co. v. City of Hinton, 476 N.W.2d 78 (Iowa 1991). In Rohlin, three contracts
for road construction included a liquidated damages provision of $400 per day for
late completion. In refusing to enforce the liquidated damages provision the court
provided:
There is no valid justification for the individual liquidated damage
amounts contained in each of the three contracts. Under the record of this
case, the person who set the $400-per-day amount in each contract is
unknown and was not called as a witness. Additionally, no witness was
called to justify the suggested liquidated damage amounts contained in the
DOT manual schedule.
. . .
We recognize that proving the amount of loss with any degree of certainty
is difficult; nevertheless, the amount of liquidated damages set in each
contract appears to be unreasonably large and goes far beyond the
anticipated loss caused by delay in performance of the contract. Id. at 81.
No Damage For Delay
The general rule in Iowa is “that a ‘No Damage’ clause in a contract is valid, but,
due to the harsh results induced thereby, will be strictly construed. However, where it
clearly appears that the contracting parties have so contracted, the same will be
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recognized…”. Owen Const. Co., Inc. v. Iowa State Dept. of Transp., 274 N.W.2d 304,
306 (Iowa 1979) citing Cunningham Bros., Inc. v. City of Waterloo, 117 N.W.2d 46, 49
(Iowa 1962).
Sample Clauses
No payment or compensation of any kind shall be made to the Contractor for
damages because of hindrance or delay from any cause in the progress of the work,
whether such hindrances or delays are avoidable or unavoidable;
or,
Contractor agrees that it may be subject to delay in the progress of the work and
that the sole remedy for such delay shall be an extension of time;
or,
In the event the subcontractor’s performance of this subcontract is delayed by acts
or omissions of the owner, contractor or other subcontractors, subcontractor may request
an extension of time for the performance of this subcontract, but shall not be entitled to
any increase in the subcontract price or to damages or additional compensation as a
consequence of such delays.
Other Authority
Generally, a no-damage-for-delay clause must be clear and unambiguous.
Williams & Sons Erectors, Inc. v. S.C. Steel Corp., 983 F.2d 1176 (2d Cir. 1993) (no-
damage-for- delay clause unenforceable where clause providing for payment of delay
impacts costs arising from change orders was also in contract); Gayon v. Bally’s Total
Fitness Corp., 802 So. 2d 420 (Fla. Dist. Ct. App. 2001) (“exculpatory clauses are
enforceable only where and to the extent that the intention to be relieved was made clear
and unequivocal in the contract, and the wording must be so clear and understandable
that an ordinary and knowledgeable party will know what he is contracting away”);
Forward Indus., Inc . v. Rolm of N.Y. Corp., 123 A.D.2d 374, 506 N.Y.S.2d 453 (1986)
(holding that no-damage- for-delay clause failed because it was not expressed in clear
and unequivocal language, but rather was obscured so as to make it probable that it would
escape the reader’s attention).
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In several states, no-damage-for-delay clauses in public contracts are void and
unenforceable. Minnesota and Missouri prohibit such clauses in public construction
contracts. In two states, Ohio and Washington, the clauses are unenforceable in both
public and private contracts.
Possible Defenses
• active interference, fraud, misrepresentation, other bad faith; or gross
negligence by the party seeking to enforce the no damage for delay clause;
• delay which has extended such an unreasonable length of time that the party
delayed would have been justified in abandoning the contract;
• delay that was not contemplated by the parties; and
• delay resulting in a breach of a fundamental obligation of the contract.
Active interference was used as the defense to a no-damages-for-delay clause in
Peter Kiewit Sons’ Co. v. Iowa Southern Utilities Co., 355 F. Supp. 376 (S.D. Iowa
1973). The court held that to be found to have committed active interference, the public
agency would need to commit “some affirmative, willful act, in bad faith, to
unreasonably interfere with plaintiff’s compliance with the terms of the construction
contract.”
The no-damage-for-delay clause is meant to cover “only those delays that are
reasonably foreseeable, arise from the contractor’s work during performance, or which
are mentioned in the contract.” U.S. v. Merit Meridian Constr. Corp. v. City of New
York, 493 N.E.2d 905, 910 (N.Y. 1986). Reasonable foreseeability includes looking at
the relationship of the parties, the objectives, and the surrounding circumstances. J & B
Steel, 642 N.E.2d 1215, 1222 (Ill. 1994).
If the delay is so long that it basically leads to abandonment of the project, the no-
damage-for-delay clause will not be enforced. As for the length, the length of the delay is
to be compared to the total time period for completion of a project. Thus no slight delay
will do. The delay must be “so extreme as to be a kind not contemplated” under the
contract. Dickinson Co. v. Iowa State Dept. Of Transp., 300 N.W.2d 112, 114-15 (Iowa
1981).
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Consequential Damages Provisions
Statutes and contracts will often use the term “consequential damages” but the
parties may not agree on what that means. A basic definition provides: “losses that do
not flow directly and immediately from an injurious act but that result indirectly from the
act.” Black’s Law Dictionary 416 (8th ed. 2004). Sometimes a contract will use the
terms “indirect” or “special” or maybe all three. Generally, the authorities treat them
much the same.
Owners will claim that things such as extended overhead, lost profits, additional
financing costs, and loss of use are within the contemplation of contractors as they
calculate potential losses. Contractor’s may claim loss of reputation, loss of bonding
capacity, extended general conditions and loss of business opportunity. Bruner and
O’Connor suggest that “foreseeability” might be viewed more broadly in modern
construction contracts than in other commercial contracting relationships for several
reasons:
• the sophistication of the parties;
• the detail with which construction contracts are prepared;
• the flexibility built into construction contracts to make changes or to give
definition to contract requirements during construction;
• the frequent practice of giving contractual definition to the type and amount of
damages awarded for certain breaches;
• the recognized “hurly-burly” of the construction process; and
• the common industry appreciation for the likely consequences of most
breaches.
Bruner & O’Connor on Construction Law § 19.18.
The AIA Approach
§ 15.1.6 Claims for Consequential Damages.
The Contractor and Owner waive Claims against each other for
consequential damages arising out of or relating to this Contract. This
mutual waiver includes:
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.1 damages incurred by the Owner for rental expenses, for losses of
use, income, profit, financing, business and reputation, and for loss of
management or employee productivity or of the services of such persons;
and
.2 damages incurred by the Contractor for principal office expenses
including the compensation of personnel stationed there, for losses of
financing, business and reputation, and for loss of profit except anticipated
profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential
damages due to either party's termination in accordance with Article 14.
Nothing contained in this Section 15.1.6 shall be deemed to preclude an
award of liquidated direct damages, when applicable, in accordance with
the requirements of the Contract Documents.
Some commentators attribute the AIA’s inclusion of the mutual waiver of
consequential damages to the Perini case. In 1983, Perini entered into a contract to be
the construction manager for the Sands Hotel renovation in Atlantic City. Perini’s fee
was to be $600,000 plus reimbursable expenses. Perini was ordered to pay $14.5 million
in damages to the owner in lost profits in arbitration. Arbitration lasted over two months
and there were over two dozen witnesses. Perini Corporation v. Great Bay Hotel &
Casino, Inc., 610 A.2d 364 (N.J. 1992).
Iowa courts will enforce a consequential damages waiver. In Polar Insulation,
Inc. v. Garling Construction, Inc., No. 15-1501 (Iowa Ct. App. October 26, 2016), the
court held:
The Iowa Supreme Court has implicitly endorsed contractual limitations on
consequential damages in the sales context. See Shinrone, Inc. v. Tasco,
Inc., 283 N.W.2d 280, 285 (Iowa 1979) (“Any seller who does not wish to
take the risk of consequential damages has available the section on
contractual limitation of remedy.” (citation omitted)). We see no reason the
same limitation would not be available here. Section 14.2 was clear, and
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we agree Polar waived its right to consequential damages. Therefore, we
affirm the district court’s grant of summary judgment on Polar’s
consequential damages claim.
* * *