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Matt has written articles and given presentations on all aspects of construction law. Find a resource here.

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Best Practices top posts include claims preparation, contract drafting, and litigation pitfalls. You don’t want to miss these ones.

Matthew DeVries

Matt is a construction & litigation attorney at Burr & Forman LLP and father of seven young kids.

Real Estate Development and Construction Contracts: What You Need to Know

Posted in Best Practices, Contract Docs, Development

Noted author and business attorney Peter Siviglia once said: “In this world, … there are two forms of writing: creative (such as novels, plays, and poetry) and expository (such as treatises, letters, memorandums, and briefs).  I’ve tried both and prefer a third: Contracts, which do not entertain, do not convey information or ideas, and do not try to persuade.

Contract (2)

In the world of commercial real estate and construction contracts, Siviglia hit the nail on the head.  Using some of Siviglia’s tips in Courses on Drafting Contracts, 12 Scribes J. Legal Writing 89 (2008-09), here are a few items to think about when drafting contracts:

  • A contract is about defining transactions and relationships.  This is more than the definition of “contract” that lawyers learn in law school (i.e., “An agreement between or among two ore more parties for the purpose of …”).  According to Siviglia, the contract will help define: (1) a transaction, such as the purchase of real estate; (2) a relationship, such as a partnership, or (3) a combination of both, such as a partnership to purchase and develop real estate.
  • A contract is a set of instructions.  Just like the building plans and specifications instruct the contractor how to build the water treatment plant, commercial condo or new hospital, the written contract instructs the parties on their course of conduct in the transaction.  And when problems arise … and they will … the written contract instructs the parties on how to perform in such circumstances. The contract defines due diligence issues on the front end; it defines performance obligations during the contract performance period; and it defines how disputes will be handled in the event of disagreement.
  • A contract should include standard provisions.   Although each contract is different, there are a number of terms and conditions that are part of the “A Player” list, including:
  1. Termination, which defines the parties’ rights to terminate the contract;
  2. Assignment, which outlines whether the parties are allowed to assign their rights to another party and the terms in which they are allowed to do so;
  3. Governing law, which defines the law (i.e., Tennessee, Virginia, New York) that will apply to the parties’ contract in terms of both substance and procedural issues;
  4. Disputes, which defines whether the the parties will litigate in court, mediate, or arbitrate;
  5. Notice, which identifies where legal notice of disputes, claims, changes, etc. are directed;
  6. Modifications, which outlines the procedures for modifying or amending the contract terms (not to be confused with a “changes” clause);
  7. Changes, which outlines the procedures for modifying or changing the scope of work by one of the parties (not to be confused with a “modification” or “amendment” clause);
  8. Claims, Rights and Remedies, which describes the method for submitting claims and may also include rights to recover or limit certain types of damages (consequential damages, liquidated damages for delays, attorneys’ fees, interest); and
  9. Indemnification, which describes the circumstance in which one party may have to indemnify (or pay the losses or claims) of the other party for some legal purpose.

Of course, each transaction or relationship should have a written contract tailored to its own project or development needs. In other words, while standard form agreements can be used on successive and multiple transactions, each project should nonetheless be reviewed for the applicability of particular standard form provisions to the particular project.  On occasion, circumstances dictate the necessity of revisions to your standard agreement.

Photo: Steve Snodgras

Which Insurance Carrier Is Responsible for Damages on a Construction Project? Depends.

Posted in Best Practices, Case Law, Legal Trends

There are multiple types of insurance coverage for the various risks on a construction project.  However, when there are multiple insurance carriers covering the same risk (i.e., general liability, builder’s risk, workers’ compensation, professional liability) over different periods of time, there may be a dispute as to which carrier covers the loss.

In a recent case, Cincinnati Insurance Co. v. Motorists Mutual Insurance Co., the Ohio Court of Appeals addressed this very issue. In that case, an electrical contractor installed certain wiring and lighting in the owner’s home during construction. Insurance Company #1 provided a commercial general liability policy (“CGL”) and an umbrella policy from 2000-2004, which covered the period when the house was built.  From 2004-2005, Insurance Company #2 provided a different CGL policy.  In 20015, the electrical subcontractor went out of business.

In 2006, the home was severely damaged due to a fire.  The home owner’s insurance carrier paid out the losses, and subsequently tried to recover those monies from the electrical subcontractor’s insurance carriers, alleging that the electrical subcontractor was negligent in the construction and installation of the wiring in the home.

finger

If you read the decision in the case, you can tell that there was a lot of finger-pointing among the parties and insurance carriers.  However, there are a few take-aways from the decision as to which insurance carrier may be responsible for damages:

  1. A CGL policy generally provides for coverage during the policy period.  In this case, the trial court concluded that the policy issued by Insurance Company #2 did not provide coverage because the property damage sustained by the Owners in 2006 did not occur during the policy period.
  2. There are different conclusions as to whether claims for defective work are covered, but most states say “no”.  In other words, there is a mess of case law all across the country about whether claims of defective construction or workmanship by property owners are claims for “property damage” cause by an “occurrence” under a CGL policy.  For purposes of the Cincinnati Insurance decision, the question was one of timing and whether the allegations of the complaint excluded the possibility that property damage was occurring during Company #2’s policy period.
  3. The duty to defend is definitely broader than the duty to indemnify.  In examining the complaint, the court in Cincinnati Insurance could not conclude that the “claims are clearly and indisputably outside the contracted coverage.” The court noted that the defective installation itself could not be considered an accident (and, therefore, could not be considered an occurrence under the policy). However, at the time the complaint was filed, it was possible that property damage occurred during the policy period and was of a continuous nature such that coverage could be implicated under the policy.

In this case, Insurance Company #1 participated in the defense of the electrical subcontractor and ultimately paid to settle the dispute. Insurance Company #1 then sought contribution from Insurance Company #2 for 75% of the settlement costs, attorney’s fees and interest.  Ultimately, the court concluded that Insurance Company #2 had the duty to defend the claim.

So What?  As an owner or developer, you should know and understand your policy coverage provided by your own insurance, as well as those provided by the contractors and subcontractors working on your projects. If you are a contractor or subcontractor, understand that you may have changed insurance carriers during a construction project and there may be multiple sources of coverage depending on the type of loss and when the loss occurred. You should keep an “insurance file” for each project that contains copies of all insurance certificates.

What the Supreme Court’s Decision on the Same-Sex Marriage Ban Means to Contractors?

Posted in Case Law, Legal Trends

Absolutely nothing! … to contractors that is … but to employers … a different answer.

ymca

Okay, so the Supreme Court recently ruled that state laws banning same sex marriage are unconstitutional under the 14th Amendment to the United States Constitution.

You may have your own personal opinion against or in support of the Supreme Court’s decision—that’s not the point of this post today. While the holding does not directly implicate employers or their policies, the ruling clearly means that persons legally married in any state, regardless of their gender, are entitled to the benefits of marriage in any other state in the union and that a state can no longer refuse to issue marriage licenses to persons based on their gender:

The Court, in this decision, holds same‐sex couples may exercise the fundamental right to marry in all States. It follows that the Court also must hold—and it now does hold—that there is no lawful basis for a State to refuse to recognize a lawful same‐sex marriage performed in another State on the ground of its same‐sex character. (Slip op. at 28).

So what? While the decision focuses on same sex marriage bans across the states, there are a few issues to be mindful of as an employer in the construction industry (or in any industry for that matter).

First, you may want to re-examine benefit policies to be sure that same‐sex married couples are not discriminated against.  Also, remember that the decision highlights the trend of extending constitutional protections to gay, lesbian, bi‐sexual, and transgendered persons. Arguably, there remains a debate about whether sexual orientation is a protected class (one side versus the other side).

Second, and more important, since harassment of persons due to their sexual orientation is considered to be sexual harassment prohibited by Title VII (and because the ruling in the same‐sex marriage case may be a topic of conversation in your workplace), it may be a good opportunity for employers to remind their supervisors that the company will not tolerate harassment based on sexual orientation and will not tolerate harassment based on sexual orientation between co‐workers either.

Special thanks to Clark Spoden, one of my partners who specializes in labor and employment law, for his contribution to this post.

Revised AAA Construction Rules Take Effect July 1, 2015

Posted in Alternative Dispute Resolution, Arbitration, Legal Trends, Mediation

The past week has been one of sweeping changes. (…no comment…)  But one set of non-controversial changes is the Revised Construction Industry Arbitration and Mediation Procedures released by the American Arbitration Association.

change2

The Rules, which take effect July 1, 2015, can be downloaded here.  The major revisions include:

  • A mediation step for all cases with claims of $100,000 or more (subject to the ability of any party to opt out).  Under the revised Rule 10, “…the parties shall mediator their dispute” where the claim or counterclaim exceeds $100,000.  The mediation is to take place concurrent with the arbitration proceedings so as not to cause delay.
  • Consolidation and joinder time frames and filing requirements to streamline these increasingly involved issues in construction arbitrations.  Revised Rule 7 requires that all requests for consolidation or joinder must be made prior to the appointment of an arbitrator or within 90 days of the date AAA determines all administrative filings have occurred, whichever is later.  A response to a request for consolidation is due within 10 days and a response to a request for joinder is due within 14 days.  The AAA has the authority to stay the arbitration or arbitrations impacted by the request.
  • New preliminary hearing rules to provide more structure and organization to get the arbitration process on the right track from the beginning.  New Rule 23 provides that at the discretion of the arbitrator, and depending upon the size and complexity of the matter, a preliminary hearing is to be scheduled as soon as practicable following the appointment of the arbitrator.  The Rule also includes a checklist comprised of 20 items that depending upon the size, subject matter, and complexity of the dispute may be addressed during the preliminary hearing subject to the discretion of the arbitrator.
  • Information exchange measures to give arbitrators a greater degree of control to limit the exchange of information, including electronic documents.  New Rule 24 provides clarity to former rule regarding “Exchange of Information.”  The arbitrator has greater control over the exchange of information with a view toward achieving an economical resolution, while also balancing each party’s ability to present their case. As to electronic documents, the new rule provides that such information should be produced in the manner most convenient and economical for the producing party.
  • Availability of emergency measures of protection in contracts that have been entered into on or after July 1, 2015. New Rule 39 will enable parties to apply for emergency interim relief before an arbitrator that will be appointed within 24 hours of the AAA’s receipt of the request for emergency relief. The Rule provides that a party may seek emergency relief by notifying the AAA and the other parties to the arbitration, and then the AAA will quickly appoint an emergency arbitrator to address the emergency issue.
  • Enforcement power of the arbitrator to issue orders to parties that refuse to comply with the Rules or the arbitrator’s orders, including the following issues:  (a) confidential documents and information; (b) reasonable search parameters for electronic and other documents; (c) costs of producing documentation; (d) issues of willful non-compliance with any order; and (e) other types of enforcement orders.
  • Permissibility of dispositive motions to dispose of all or part of a claim. New Rule 34 This specifically provides that upon prior written application, the arbitrator may permit motions that dispose of all or a part of a claim, or narrow the issues in a case.

The revised rules also include provisions for giving arbitrators the power to award sanctions, disclosure provisions, and evidence by affidavits and post-hearing filings of documents.

Happy Birthday AAA Supplementary Construction Rules for Fixed Time and Cost

Posted in Alternative Dispute Resolution, Arbitration, Best Practices

Happy Birthday to You! Happy Birthday to You! Happy Birthday Dear AAA Supplementary Rules! Happy Birthday to you!

One year ago, the American Arbitration Association implemented new rules to provide an arbitration process that would be more predictable in terms of time and cost. The Supplementary Rules for Fixed Time and Cost Construction Arbitration (“Supplementary Rules”) were established to control:

  1. the maximum time to complete the arbitration;
  2. the number of hearing days the arbitration will run;
  3. the arbitrator costs; and
  4. the AAA administration fees.

How the Rules Work? Of course, being created by the AAA, the Supplementary Rules are intended to be administered by AAA arbitrators. According to the rules, the time to complete the arbitration, the number of hearing days, and AAA fees and arbitrator compensation, are calculated according to the applicable Time/Cost Schedules and are based on the larger of the claim or counterclaim. If you attempt to change the number of hearing days or time frame, the AAA may in its discretion apply the Regular Track or Large, Complex Case Track of the Construction Industry Arbitration Rules.

So What? After you review the Supplementary Rules, you can tell that they are most useful for those cases where there is a distinct issue in dispute and there is not going to be the need for significant discovery.  Here are some of the key components:

  • If the parties’ contract calls for application of the Supplementary Rules, then AAA will administer the case under those rules.
  • If parties agree to an existing dispute want to use the Supplementary Rules, they may commence an arbitration by filing a submission agreement to arbitrate under the Supplementary Rules.
  • A party files a demand for arbitration in accordance with their construction contract, but is limited to 5 pages.
  • The respondent has up to 14 days to answer, which also may not exceed 5 pages.
  • A party has up to 30 days from the filing of a counterclaim to amend its claim or counterclaim.
  • An administrative conference shall take place within three days of filing for arbitration, and within 14 days after the conference, the parties shall meet (either in person or by phone or video conference) and confer.
  • Only one arbitrator shall administer the proceedings. The parties must select the arbitrator, when the hearing will occur, maximum number of days for the hearing, and the extent of discovery.
  • The arbitrator is authorized to amend and approve the discovery plan for the parties. If the parties fail to agree on terms, the Supplementary Rules provide guidance.

Ultimately, the arbitrator must make an award to the parties not more than 20 days from the close of the hearings. The rules provide the form for the award, amount of arbitrator’s compensation, and administrative fees. Fees range from $10,500 to $52,000. The rules also provide for remedies for nonpayment and defaults.

schedule
Questions: Have you used the Supplementary Rules in your construction contracts? Have you arbitrated a case using them?  I’d love to hear some feedback.

The Real Lemon in the Bunch: Understanding Pay-If-Paid Clauses

Posted in Best Practices, Legal Trends, Tennessee, VA, DC, MD

As you may be aware, one of the greatest risks on a construction project involves the payment process. Just like my kids expect to be paid for the lemonade they sell, contractors and subcontractors expect to be paid on a timely basis once the work has been performed.

2009-10-31 10.12.03

Contractors have a means of shifting the risk of non-payment by the owner to its subcontractor by including a certain payment provisions in the subcontract agreement.  The enforceability of these types of clauses may be limited by your particular state or jurisdiction.

In Universal Concrete Products Corp. v. Turner Construction Company (pdf), the U.S. Court of Appeals for the 4th Circuit concluded that a “pay if paid” clause in a subcontract was not ambiguous and, therefore, enforceable against the subcontractor.  The work involved the construction of the Granby Tower Project in Norfolk, Virginia. The subcontract between the general contractor and the concrete subcontractor contained the following clause:

“The obligation of contractor to make payment under this agreement, whether a progress or final payment, or for extra or change orders or delays to the work, is subject to the express condition precedent of payment from the owner.”

The owner ultimately lost its construction financing on the project and abandoned the development. Since the contractor had not been paid for its work, it refused to pay the subcontractor’s work.  In a payment dispute between the subcontractor and contractor, the contractor argued that the “pay if paid” clause provided an absolute defense to payment. (Again, it should be noted that some states limit the enforceability of these clauses by either statute or case law. However, in Virginia, these types of clauses are enforceable so long as they are clear and unambiguous.)

The subcontractor argued that the prime contract between the owner and the contractor defined the cost of work to include “payments made” to subcontractors. Accordingly, the subcontractor argued that the contractor would, under the normal scenario, be paying its subcontractors and submitting the invoice to the owner as a “payment made” by the contractor. Both the trial court and the Court of Appeals disagreed, finding that payment from the owner was a condition precedent to payment from the contractor to the subcontractor.

Courts across the country vary in their treatment of these issues. For example, in the Universal Concrete Products case, the 4th Circuit reasoned that Virginia courts favor the freedom to contract and that parties are freely able to negotiate and draft these types of provisions. However, in Thomas J. Dyer v. Bishop International Engineering, the 6th Circuit refused to enforce a “pay when paid” clause because the court determined that the clause was sufficiently ambiguous. In that case, the contract stated that “no part of payment shall be due until 5 days after the owner shall have paid the contractor.”  Other jurisdictions, such as California, New York and Nevada, have expressly ruled that the “pay as paid” clauses are unenforceable as a violation of state public policy.

So, what should your contracts provide?  What should you do to determine the enforceability of a “pay if paid” clause in your state?

  • Contact an attorney within your jurisdiction to determine whether there are any limitations of the enforcement of these type of clauses.  Since each state differs dramatically, it is in your best interest to determine the applicable standard in your state or the applicable law where the project is located or the governing law of the contract to determine this information.
  • Determine as between the parties who should bear the risk of non-payment. If you are a general contractor, you should make sure that your subcontracts include clear and unambiguous language placing the risk of loss for non-payment on the subcontractor. In addition to putting a timing mechanism on payment of funds to the subcontractor following a certain number of days after payment by the owner, it is also advisable to include a clause that “payment by the owner to the contractor is a condition precedent to payment by the contractor to the subcontractor”. In addition, you can make your subcontracts explicitly clear by stating that “the subcontractor assumes the risk of non-payment by the owner due to insolvency or other inability to pay”.

For the contractors out there, Universal Concrete Products is a good reminder of the importance of drafting clear and unambiguous contact terms between the parties.  It is worth the effort to seek legal advice on these issues prior to drafting and executing contracts with other parties.

For the legal practitioner, Universal Concrete Products again reminds us of the importance of legal research in our profession.  It is imperative that we, as a legal advisor, stay up to date on the case law within in our jurisdiction, as well as check other jurisdictions to help guide our clients through legal risks.

Discover an Underground Storage Tank During Construction? What Next?

Posted in Best Practices, Tennessee, Transportation

HQ Construction, the Tennessee Department of Transportations new monthly newsletter, recently highlighted in its June 2015 issue an instance when a road builder discovered what appeared to be an underground storage tank (UST).  That can certainly disrupt construction, right?

HQ Construction (June 2015)

HQ Construction (June 2015)

During excavation activities of the I-40 Fast Fix 8 project, Kiewit Construction unearthed what appeared to be a UST associated with a building that no long existed.  The UST had not been identified during the Phase I environmental assessment.  Unfortunately, during excavation a track hoe operator accidentally punctured the UST, causing 1,000 gallons of water to be released into the excavated area.  According to the HQ Construction newsletter, Kiewit worked with TDOT and the Tennessee Department of Environment and Conservation to safely mitigate the problem.

What should you do if a UST is discovered during construction?  While the lesson above demonstrates what appears to be a happy ending, contractors should be mindful of the risks associated with differing site conditions and environmental impacts related to USTs.  Here are a few tips should you find yourself in the situation as Kiewit did on the Fast Fix 8 project:

  1. Stop work immediately.   Many contract documents require the contractor to “immediately suspend” the operations upon the discovery of an environmental hazard.  Even if your contract does not address this situation, you should stop work to properly analyze the situation.
  2. Call others.  This includes the owner (whether public or private), the architect/engineer of record, an environmental consultant or attorney, and pertinent (if necessary) environmental officials.  Have an attorney check applicable laws regarding environmental reporting obligations to to see whether you have a duty to notify any other public authorities.
  3. Assess options.  Consider immediate response activities to mitigate releases of hazardous substances or petroleum products.  Depending on your jurisdiction, you may be required to develop a remedial plan, which would require the hiring of an environmental consultant or engineer.
  4. Preserve claims.  As always, the parties’ contract should address risks such as “environmental hazards” of “differing site conditions” on the construction site.  Generally, the owner of the site is required to take action to continue the work and resolve the problem.  The contractor may be entitled to additional time and money for the impact of the discovery and remediation efforts.

In the situation above, it appears that TDOT, TDEC and the contractor worked together to efficiently and safely remove the UST without significant impact to the work.  After the removal, the contractor was able to continue its work.

[Thanks to fellow partner and environmental attorney, Greg Young, for some added tips!]

“New” Means “New” When the Construction Contract Says “New”

Posted in Best Practices, Case Law, Federal Construction, Legal Trends

There’s “new.” And there’s “new to you.” And there’s “refurbished new.” And there’s “open box special new.” And there’s “floor display model new.”  But when it comes to contract specifications requiring “new” equipment, one court looked to a dictionary to define it as “never used before” and “free of significant damage.”

Dictionary

In a recent case, Reliable Contracting Group, LLC v. Department of Veterans Affairs, 779 F.3d 1329 (Fed. Cir. 2015), the Government entered an agreement with the Contractor to install three back-up generators.  The contract specifications required new equipment:

All equipment, material, and articles incorporated into the work covered by this contract shall be new and of the most suitable grade for the purpose intended, unless otherwise specifically provided in this contract.

A dispute arose over the nature of the equipment supplied because the contract did not define the word, “new.”  Furthermore, Federal Acquisition Regulation 52.211-5, which was incorporated into the contract, requires that supplies “new, reconditioned, or remanufactured,” and it defined “new” to include that the supplies be “composed of previously unused components.”

The generators that were delivered to the site by the Contractor’s supplier were in terrible condition, showing a lot of wear and tear.  Investigation revealed that the generators were manufactured in 2000, purchased by others, but never actually used before they were delivered to the Governments site in 2004.  The Government ultimately rejected the initial equipment, but later approved different generators that were installed.  The Contractor submitted a claim for $1.1 million for additional costs incurred as a result of the Government’s wrongful rejection of the initial generators.

One “New ” Definition. In support of its claim of wrongful rejection by the Government, the Contractor argued that that the original generators were “new” because they had never been used, even though they were previously owned and damaged by improper storage.

Another “New” Definition.   The Goverment argued that to be considered “new” the equipment must be “capable of being tested at the factory.” Because the generators left the factory in 2000, they were incapable of being factory tested in 2004 and therefore not “new.” This was an interesting argument because factory testing was optional in the contract and the Government never requested it.

Yet Another “New” Definition.  A divided panel of the U.S Court of Appeals for the Federal Tenth Circuit rejected both definitions of “new” and instead determined there was an ambiguity.  Accordingly, the Court looked to the dictionary definitions of “new” and to industry definitions, standards, and practices:

One possible meaning is . . . that “new” means not previously owned by another. . . .“New” could require that the generators be recently manufactured. . . .  “New” could require a fresh condition. . . . We think this definition is appropriate for purposes of § 1.47. There is no testimony as to how, in the industry, a generator can be “new” if it has been severely damaged. It defies logic to conclude that the parties intended to treat seriously damaged generators as “new.”

The Holding. The Court held that new does not require that the equipment be entirely free of cosmetic defects.  Rather, “new” requires that the generators must not be used and also must be free of significant damage, i.e., damage that is not cosmetic.  Based upon the definitions adopted by the Court, the case was remanded to the board to determine whether damage to the original generators was significant enough to render them “not new.”

So What? The Contractor in this case was in a difficult spot.  Where the original generators were in terrible condition by accounts of all observers, the Contractor ultimately forced its supplier to provide new ones and try to recover its losses at a later time.  The decision demonstrates how courts deal with contract ambiguities and often attach meanings to contract terms that may not have been anticipated by the parties.

Government Contractors: Threatening to File a Claim is Not the Same as Filing a Claim

Posted in Case Law, Claims and Disputes, Federal Construction, Legal Trends

Words matter. Grammar matters. Even punctuation matters:

Let’s eat, Grandma!

Let’s eat Grandma!

For one government contractor, its claim was recently rejected by the Civilian Board of Contract Appeals because the Board found that the Contractor did not properly state its claim.  In Construction Group LLC v. Dept. of Homeland Security, 15-1 BCA para. 35900 (Mar. 5, 2015), aff’d, CBCA 4459-R (Apr. 22, 2015), the Board dismissed the case for lack of jurisdiction because no underlying claim or contracting officer decision existed.

The Dispute.  The US Coast Guard awarded a $500,000 contract to Construction Group LLC to restore a pump station and perform certain electrical repairs.  Almost six months after completion of the project, the Contractor wrote a note to the contracting office, “advising [her] of [its] intent to submit a claim arising under and relating to the … contract.”  Two months later, the Contractor again told the contracting officer that “it is our intent to submit a claim” for certain re-work that had been performed. Almost a year after its first letter, the Contractor wrote that it was making a claim “to modify, reform and renegotiate the contract,” but it did not attach any claim to the letter.  More than two years after completion of the project, the contracting officer wrote a letter, closing out the contract.

The Result.  The Contractor filed an appeal from the contracting officer’s close-out letter.  The Department of Homeland Security objected to the appeal on the basis that the Board lacked jurisdiction since there was never any official claim submitted by the Contractor.  The Board rejected the appeal, noting the following:

Here, it is clear that neither the contractor nor the Government has made a claim. We understand that Construction Group is upset with the Coast Guard’s determination that all work done under the contract was satisfactory . . . . The contractor has on several occasions manifested an intent to make a claim or claims under the contract, but the record contains no evidence that any such claim was ever made.

So What?  As this case demonstrates, words do matter!  Under the controlling law, a claim is “a written demand or written assertion … seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or related to the contract.”  Stated differently, an “intent to file a claim” is not the same as “claim is hereby made” when you are communicating with the contracting officer.

Contractor Submits “Penny Bid” for Rock Removal and Loses in the End

Posted in Case Law, Contract Docs, Legal Trends

In our house of seven children, a penny found on the ground brings laughter and excitement. You can imagine the opposite reaction when a contractor bids a penny for rock removal for a competitive bid and later discovers that there was 250% more rock than anticipated.

Penny

That’s what happened recently in Celco Construction Corp. v. Town of Avon. In its successful bid to perform work for the Town of Avon, th Contractor assigned a unit price of $0.01 to excavate each cubic yard of rock from the site. Of course, that price was substantially lower than its actual cost to remove rock, but the Contractor based its bid on the assumption that the amount of rock actually on site would be considerably less than the unverified estimate indicated in the contract bid documents.  The Contractor believed its low unit price would give it a competitive advantage when compared to other bidders who bid more closely to the actual cost.

When the amount of rock turned out to exceed the estimate by more than 1,500 cubic yards, the Contractor sought an “equitable adjustment” in the contract price to recover its increased costs for rock removal. The Town rejected the Contractor’s request and the trial court found in favor of the Town.  The appellate court affirmed the trial court’s decision.

Quantity versus Quality.  The Contractor based its request for equitable adjustment based entirely upon the increased quantity, rather than the nature of the rock encountered. This was an important distinction for the court when reviewing the differing site conditions claim:

Celco submitted no evidence suggesting that the character of the rock discovered on site was different, or that the actual unit cost to remove it was greater, by reason of the increased amount or any other concealed condition.

To be clear, the Contractor sought additional compensation based solely on the “additional rock” and not due to some concealed condition.

The Court’s Reasoning.  Viewing the claim under Massachusetts’ differing site conditions clause, the court noted that the contract bid documents expressly denied the accuracy of the amount of rock to be encountered on the site.  The figure as “solely for the purpose of allowing comparison of the submitted bids.” In other words, teh amount of rock was “indeterminate.”  Since there was no proof that there was a material difference in the actual subsurface or latent physical conditions at the site to cause an increase in the cost of the work, the appellate court affirmed the trial court’s decision.

So What?  This case is a good example for contractors to review when evaluating their competitive bid processes.  While it may be a gamble to include a “penny bid” unit cost in your bid, make sure the risk of exposure does not outweigh the competitive bid advantage you seek.  Additionally, make sure to review your applicable “differing site conditions” clause in the contract documents before you submit your bid. In order to be considered a “changed condition,” most contracts require that the nature or character of the concealed subsurface condition must be “materially different” than the known condition. As noted by Celco, unit prices generally will not be altered based solely on increased quantities.