Construction Industry Institute

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Equitable Risk Allocation:
A Legal Perspective

Construction Industry Institute

Contracting to Appropriately Allocate Risk Research Team

Implementation Resource 210-3

February 2007
© 2007 Construction Industry Institute™.

The University of Texas at Austin.

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Printed in the United States of America.

Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Contract Language Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Legal Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

iii
Executive Summary

When allocating construction risks, appropriate allocation is often not achieved due to the
inferior bargaining position held by lower-tier parties. Beyond this dilemma, the most appropriate
and equitable allocation of a particular risk can vary from project to project depending on factors
such as the type of risk, work, and contract. As a result, no single, appropriate allocation exists for
a given construction risk for all projects. Unfortunately, arriving at a conclusive agreement between
contracting parties as to the most appropriate allocation of a given construction risk for a specific
project can be a cumbersome, albeit crucial, task.

Due to the problems associated with determining appropriate risk allocation between contracting
parties, the Construction Industry Institute (CII) formed the Contracting to Appropriately Allocate
Risk Research Team in an effort to encourage risk assessment and allocation in a compromising and
educated manner, recognizing the unique circumstances of each specific project. By involving both
the owner and the contractor in the risk allocation process, which should begin early in the project
life cycle, both parties can avoid the increased costs associated with inappropriate risk allocation.
To aid in this process, the research team developed the Two-Party Risk Assessment and Allocation
Model, which encourages contracting parties to compromise during the risk allocation process.

This publication is meant to accompany the Two-Party Risk Assessment and Allocation Model by
providing useful legal perspective references regarding both contract language and legal research.
This book looks at the top 14 risks, identified as the “hot-button” risks, which are listed below in order
of the most to the least frequently allocated in an inappropriate manner:
1. No Damages for Delay 8. Cumulative Impact of Change Orders
2. Consequential Damages 9. Owner-Mandated Subcontractors
3. Indemnity 10. Insurance Allocation
4. Ambiguous Acceptance Criteria 11. Differing Site Conditions
5. New or Unfamiliar Technology 12. Design Responsibility
6. Force Majeure 13. Waiver of Claims
7. Schedule Acceleration 14. Standard of Care

A contract language table was generated for each of the 14 “hot-button” risks. Various examples
and/or concepts of contract language were analyzed and categorized according to perceived biases
and compromises to help contracting parties consider the most pertinent risk issues and potentially
identify “appropriate” compromising clauses.

The research team also developed legal perspective references that provide educational
assistance to contracting parties. Those references are contained in this book. The highlight of
the legal research for each risk is a legal issues and considerations flow chart. These charts help
minimize much of the confusion and ambiguities surrounding the allocation of each risk, as well as
denote which party may actually be carrying the associated risk in the eyes of the court.

Industry participants are encouraged to use this publication in conjunction with the Two-Party
Risk Assessment and Allocation Model (Implementation Resource 210-2) or as an independent
educational resource regarding risk allocation from a legal perspective.

v
Chapter 1: Introduction

The Purpose of this Implementation Resource

This publication is a result of CII research into risk allocation. It covers contract language and
legal research for the 14 risks that are most often cited as “allocated inappropriately.” Accordingly,
these risks can be thought of as possessing the most potential for spawning disputes during
contract negotiations. It is intended as a guide for contracting parties so that they can become more
aware of the associated risk issues from a legal perspective. It also will give contracting parties a
better understanding of which party is really carrying a given risk and how the parties may reach
a compromising position. Accordingly, the parties will be in a better position to draft appropriate
contract language and compromising terms and conditions. This is not a legal book, nor does it
purport to be a comprehensive digest of existing statutory or case law. What is ubiquitous is the
common nature of the problems and it is in identifying the nature and implications of the problems
that this study seeks to give the industry a basis for coming to common terms.

“Hot-Button” Risks
CII formed the Contracting to Appropriately Allocate Risk Research Team to develop a risk
assessment and allocation model that will aid contracting parties in cooperatively identifying,
assessing, and ultimately allocating risk on any specific project. The data collected by the research
team yielded a list of 14 “hot-button” risks that are frequently allocated in an inappropriate manner.
Table 1 displays the top 14 risks most frequently allocated in an inappropriate manner in ascending
order from the most frequently to the least frequently as determined by various research inputs.

Table 1. Top 14 Risks Most Frequently Allocated in an Inappropriate Manner

Top 14 Risks
1. No Damages for Delay 8. Cumulative Impact of Change
Orders
2. Consequential Damages 9. Owner-Mandated Subcontractors
3. Indemnity 10. Insurance Allocation
4. Ambiguous Acceptance Criteria 11. Differing Site Conditions
5. New or Unfamiliar Technology 12. Design Responsibility
6. Force Majeure 13. Waiver of Claims
7. Schedule Acceleration 14. Standard of Care

Risk Allocation Tools

The research team noted the general lack of education surrounding the topic of risk allocation. As
a result, a primary focus of the research was to develop a model that could be used as a learning tool
to educate the industry on the legal issues surrounding risks commonly allocated in an inappropriate
manner. Accordingly, the research team developed the two legal perspective references contained

1
here along with a database of risk allocation principles. These three risk allocation tools are to be
used during and after the contracting parties have completed the risk assessment process developed
by the team (see CII Research Summary 210-1 and CII Implementation Resource 210-2).

Risk Allocation Principles: A Risk Allocation Tool

The research team developed a list of risk allocation principles that will help negotiating parties
decide which party is the appropriate party to assume each particular risk. These principles will get
both contracting parties to consider the most important risk allocation concepts and ideas that have
the most potential to be overlooked or disregarded. The principles are divided into two separate
categories: (1) general risk allocation principles and (2) legal risk allocation principles.

General Risk Allocation Principles

• Many risks cannot be entirely eliminated, but can be controlled.
Example: Contracting parties will never be able to eliminate the possibility that a war
will break out and halt the progress of a project in a particular geographical area.
However, the possibility can be lessened by carefully selecting the geographical
location of the project, while the potential financial impacts can be accounted for by
drafting force majeure language that addresses the risk of war.

• Eliminating one risk may cause new risks to materialize.

Example: Suppose an owner wishes to completely avoid any and all liability for
differing site conditions. Accordingly, the owner provides no representations of said
site conditions, and contractually requires the prospective contractors to investigate
the conditions for themselves and bid accordingly. Although the owner will have
successfully shifted the risk of differing site conditions to the contractors, the owner
will now have to hope that the bidding contractors do not severely overestimate or
underestimate their increased contingencies. Both extremes could result in disaster to
the project’s success.

• Many risks are interdependent so it is important to evaluate risk dependencies to be

able to predict the cumulative impact or “domino effect” that may materialize with the
realization of one individual risk.
Example: If a project has a difficult time attracting skilled crafts to perform the work,
a multitude of risks could materialize: delays, rework, increased project management
costs, increased absenteeism rates and many other secondary risks will have an
increased likelihood of occurring if unskilled craftsmen make of the majority of a
project’s work force.

• “Lessons learned” from inappropriate risk allocation should be meticulously

documented.
Example: If a new, altered version of a contract clause is utilized for a project, litigation
ensues and the resultant proceedings end with a court rendering an unfavorable,
completely unforeseen verdict pertaining to the altered clause, the clause alterations
and project circumstances that led to the ruling should be exhaustively recorded.

2
• The optimum allocation of many risks may involve shared responsibility.
Example: Similar to the trend of many courts to provide common law indemnification
rights on a comparative fault basis, it is simply more efficient and equitable to share
risks rather than to load a weaker, single party with the majority of risks.

• Ignoring a risk will not eliminate its potential costs. If a risk is not contractually allocated,
it will be assumed, knowingly or unknowingly, by one or both of the contracting parties.
Example: If a risk is not allocated in a contract, parties often end up in arbitration
or litigation to argue over the implied allocation. The U.S. legal system is based
on a common law system that will assign the implied allocation according to the
precedence established by previous case rulings. Depending on numerous project-
specific circumstances, common law rulings may yield a sharing of liability or a
complete shift.

• The optimum allocation of any particular risk may change from project to project
depending on the unique circumstances of the project.
Example: A very clear example would pertain to limits of liability. Optimum limits of
liability will vary from project to project depending on the available insurance policies
and the financial capacities of the client and contractors involved.

• Any particular party ought to be able to assume a risk if that party: (1) understands the
risk, and (2) an adequate reward exists for the assumption.
– Adequate reward may come in the form of a risk/reward contractual arrangement or as
a high probability for increased profit from the assumption of the risk.
Example: A severely schedule driven project, such as a semiconductor manufacturing
plant project, will most likely have very high liquidated damages associated with late
completion. Accordingly, a sophisticated contractor will recognize that its client has a
large amount of earnings at stake, thus justifying the risk of large sums of liquidated
damages being assessed. However, the client should also recognize that it has a
lot to gain by on time or early completion, thus a contractual provision establishing
a monetary reward for on time or early completion should be established to make it
reasonable for the contractor to accept the risk.
• If the damages of a risk allocated to the contractor are foreseeable, the contractor has
the responsibility to account for the risk in the bid price.
Example: If a contract holds a contractor liable for an owner’s consequential damages,
the contractor should account for the possibility of the damages materializing within its
bid.

• Consideration should be given to the fact that in some cases it may be fiscally efficient
for some owners to reallocate common risks between the parties upfront in exchange for
a higher bid price or a contractual reward scheme.
Example: A casino project will typically carry very high liquidated damages for late
completion. If a reward scheme is not implicitly established, an owner may still prefer
to pay “extra” through an extremely padded contractor contingency rather than lower
the liquidated damages sum and lessen the incentive for early or on time completion.

3
• Both parties should always consider the ability of the risk-bearing party (including
insurance companies) to survive the materialization of the risk.
Example: Merely successfully shifting a risk to a party does not eliminate the risk that
the assuming party may not be able to remain solvent if the risk should occur. This is
precisely the reason why the private insurance sector refuses to insure flood damages
and instead yields this role to the government. The widespread damage associated
with a flood could easily force a private insurance company out of business.

• Owners should realize that shifting risk will often increase the contractor’s price, and
should determine whether such risks could be more cost-effectively accounted for with
owner retention.
Example: Sophisticated contractors will typically recognize onerous contract terms
and if negotiations are unsuccessful or not attempted, bid prices may significantly
increase. Examples of such contract terms include no damages for delay clauses,
non-waivers of consequential damages, and high liquidated damages provisions.

• The maximum possible loss for each risk should not be overlooked or confused with the
maximum probable loss.
Example: The maximum possible loss for a risk is the worst case scenario. The
maximum probable loss can be interchangeably defined with the “expected value”
of a risk. Specifically, none of the associated project personnel accounted for the
maximum possible loss associated with the collapse of the World Trade Center
towers. Instead, the towers were designed and constructed according to the maximum
probable loss.

• Parties should determine the potential for profit that each risk may or may not possess.
Example: Risk/reward schemes encourage amiable contracting relationships while
providing clear incentives and disincentives pertaining to performance. Therefore,
whenever possible parties should identify and utilize opportunities where an
increase in risk assumption is directly correlated to an increase in potential monetary
compensation. When potential for profit is considered for every single risk, the
optimum allocation may not always be the most efficient (lowest bearing cost) or
equitable (most control over risk) allocation, but may instead create the highest
likelihood for project success (on time, on budget completion).

• To facilitate a non-controversial contractual relationship, contracting parties should strive

for harmony among all contract clauses.
Example: An owner should not attempt to include a no damages for delay clause in
conjunction with a liquidated damages clause. Essentially, this demonstrates to the
contractor that it will be responsible for its delays to the project, while the owner will
not take responsibility for delays it causes. This breeds a controversial relationship
from the outset.

4
Legal Risk Allocation Principles
• Courts will construe provisions exactly as they are written (unless they are against public
policy or statute). – Stricticti Juris
Example: Unless illegal or ambiguous, courts will look at the plain and ordinary
meaning of contract language in order to ascertain the intentions of the parties.

• Courts will only construe a contract provision in a manner that will do substantial justice
to the parties. – Strictisimus Juris
Example: Courts will not interpret contract language to indicate an intention that
clearly differs from extrinsic evidence speaking to an alternated agreed upon
interpretation between the parties. In other words, a court will not construe ambiguous
terms in their most unfavorable light.

• Specific contract language will be construed over general language.

Example: A broad clause that states that the contractor is responsible for providing all
materials and labor for a project will not overrule a specific clause that states that the
owner will provide certain enumerated materials for construction.

• General disclaimers are not usually enforceable.

Example: General disclaimers of the accuracy or sufficiency of site conditions
provided by the owner will typically not be enforced by a court.

• By signing the contract, you have accepted what is in it. – Caveat Emptor – “Let the
buyer beware.”
Example: A recent legal case reviewed by the author dealt with a design/build
contractor’s complaint that unbeknownst to the design/build contractor, its contract
with the owner contained both performance and prescriptive specifications. When the
design/build contractor attempted to install the prescriptive work as performance-
based work, the owner disputed the work. The court ruled in favor of the owner citing
the fact that the contractor had not read the specifications closely enough to realize
that they contained performance and prescriptive specifications.

• No contractual arrangement can reallocate intentional wrongdoings or illegal activities.

Example: No state will allow an indemnification clause to provide indemnification for
willful acts that will knowingly cause harm to other parties.

• Contractual ambiguities will be construed against the drafting party. – Contra

Proferentem
Example: If a clause in an owner-contractor contract ambiguously specifies the
acceptance criteria for a project, the contractor will be allowed to rely on its own
reasonable interpretation and the owner will assume all resultant increased expenses.

5
 • If the contract is silent regarding damages, the offending party will be held responsible
for the damages “reasonably foreseeable” as a result of their conduct.
Example: The most well-known example would pertain to consequential damages. If
a contract does not address consequential damages, all contracting parties will be
held responsible for damages that should have reasonably been foreseen as a result
of actions or inactions of the parties. For example, if a vendor delays in delivering a
piece of equipment to a manufacturing facility, the vendor will be held responsible for
the lost profits that would have been averted if the machine would have been fixed on
time. The vendor should have reasonably anticipated that its delay would have resulted
in a loss in production and ultimately a loss in profits.

Legal Perspective References: Risk Allocation Tools

The first of the two legal perspective references developed is a set of contract language tables
that give samples and concepts of contract language for all 14 of the “hot-button” risks. The contract
language tables will assist contracting parties in drafting and negotiating compromising clauses by
making them aware of the major contract language concepts and issues as perceived by the widely
represented research team consisting of owners (public and private), contractors, subcontractors,
attorneys, insurance/risk management representatives, and A/Es. Parties will also be able to
reference the contract language tables for each of the 14 risks to receive guidance as to where an
existing clause may fall on the continuum of appropriate or optimum allocation.

The second legal perspective reference is legal research on the U.S. judicial system’s attitudes
surrounding 10 of the 14 “hot-button” risks. The main purpose of the legal research is to identify the
major legal issues and considerations pertaining to each of the 10 risks researched. The secondary
purposes of the legal research are to determine (1) how the U.S. judicial system will allocate a
particular risk in the case that it is not allocated in the contract documents and (2) the exceptions to
enforceability established by the courts when the risk is included in the contract documents. Due to
the availability of massive amounts of data, the research team conducted legal research for only 10
of the top 14 “hot-button” risks, exclusively. The highlight of each risk discussion is the flow chart that
summarizes the legal concepts that contracting parties should be most aware of.

Common Law Definition

Essentially, common law is case law or rules and standards determined by previous decisions in
specific cases. Common law can be defined as the precedence established by court decisions over
many centuries based not on statutory law, but on the decisions of judges. In this sense, the research
team hopes to invoke Oliver Wendell Holmes as he asserted:

“The life of the law has not been logic: it has been experience. The felt necessities of
the time, the prevalent moral and political theories, intuitions of public policy, avowed
or unconscious, even the prejudices which judges share with their fellow-men, have a
good deal more to do than the syllogism in determining the rules by which men should be
governed.” (Holmes, 1881)

6
Legal Perspectives Disclaimer
CII and Research Team 210 make no representations, warranties, or covenants as to the legal
information contained in or the legal opinions expressed in this implementation resource including,
without limitation, the accuracy or completeness of such information or opinions. The recipient
acknowledges that CII shall have no liability to recipient resulting from the provision or use of these
contract language or legal research materials to or by recipient. The contract language and the legal
research information were compiled by CII from sources believed to be reliable. We trust that you will
customize these samples to reflect your own operations and believe that these samples may serve
as a helpful platform for this endeavor. Any and all information contained herein is not intended to
constitute legal advice and accordingly, you should consult with your own attorneys when developing
programs and policies. We do not guarantee the accuracy of this information or any results and further
assume no liability in connection with these sample materials and sample policies and procedures,
including any information, methods or suggestions contained herein. Moreover, CII reminds you
that these materials cannot be assumed to contain every acceptable compliance procedure or that
additional procedures might not be appropriate under the circumstances.

As stated above, this study does not purport to constitute legal advice. Additionally, the
complexities of the facts underlying each particular construction dispute are such that even cases
interpreting longstanding contract clauses may seem like a matter of first impression to the court. This
study is intended to only educate the reader as to the general concepts discussed. It is not intended
as a substitute for competent legal advice. Further, the suggested resolution of risk allocation set forth
herein cannot be said to be the last word on the subject, but rather should represent a significant
first step in approaching a reasonable allocation of risk that ultimately will set standards within the
construction industry rather than allow the “law of the jungle” to prevail.

7
Chapter 2: Contract Language Tables

Introduction
The contract language tables are a critical tool when analyzing or drafting a construction contract
clause involving any of the 14 “hot-button” risks. The research team investigated contract language
clauses associated with each of the top 14 “hot-button” risks to identify clauses that seemed to
contain a bias and clauses that seemed to provide compromising language. Accordingly, the contract
language tables give examples and/or concepts of contract language for each of the top 14 risks that
may 1) favor the buyer, 2) favor the seller, or 3) compromise. Typically, the buyer language favors the
owner in an owner-general contractor contract or the general contractor in a general contractor-
subcontractor contract. Conversely, the seller language typically favors the general contractor in
an owner-general contractor contract or the subcontractor in a general contractor-subcontractor
contract.

Research and Findings

The contract language tables were developed by reviewing existing standardized and privatized
contracts and conducting phone interviews with four industry personnel thoroughly experienced
with drafting and negotiating contract language for their respective organizations. These industry
experts were all employees of CII member companies, with two interviews conducted with major
owner organizations and two conducted with major contractor organizations. When applicable, the
legal issues and considerations revealed through the extensive legal research were used to provide
guidance for clause construction. Lastly, the wide representation of the CII research team was utilized
to scrub the tables and ensure that all contracting parties’ interests were adequately expressed.

Application of Findings
The contract language tables can be used as a contract language negotiating point between
buyer and seller parties who have identified one of the top 14 risks as a high concern that needs
mutual attention to ensure appropriate allocation. The compromise language is suggested only and
obviously provides no guarantee of success absent such factors as the good faith and ability to
perform of the parties. Internally, an industry participant may find it useful to compare its company’s
existing standardized clauses pertaining to each of the 14 “hot-button” risks to the contract language
found in the contract language tables developed by the widely represented CII research team to
determine where there are commonalities or disagreements.

The Contract Language Tables

The following pages contain the contract language tables developed for each of the top 14
“hot-button” risks. The contract language tables are organized from the most to the least frequently
allocated in an inappropriate manner, beginning with the “No Damages for Delay” contract language
table. At the top of each table, a list of “issues” has been compiled. These “issues” should be
considered when negotiating clauses while referencing the 14 contract language tables.

9
 1. No Damages for Delay
• ISSUES: Time only v. time and money, notice provisions, fixed schedule of compensation, foreseeability,
owner cooperation, active owner interference (“inexcusable incompetence”), contractor contingencies,
subcontractor contingencies, length of delay before compensation (or) as an exception to the clause,
owner-financing considerations (price-certainty), excusable v. non-excusable delays…

Favors Buyer Compromises Favors Seller

• Language that provides time • Language that contains limits/ • Language that establishes
relief only to a contractor from exceptions of recovery for a fixed schedule of
owner-induced delays. All other delay damages ($ and time). compensation for owner-
damages indirectly or directly Language may also include induced delays.
related to the delays are non- a requirement governing the
recoverable. level of proof necessary to “For each day that the Contractor
demonstrate delay (or) it may is delayed by the Owner or
“No interruption, interference, define how monetary recovery Owner’s agents, the Owner will
inefficiency, suspension or delay in is to be calculated to exclude pay the Contractor a fixed sum of
the commencement or progress of items such as profit, or certain $XX,XXX per day of delay.”
the Work under this Contract, from overhead cost elements. If
any clause whatsoever, including a time extension is part of
those for which Owner may be the agreed upon remedy for
responsible in whole or in part, owner-induced delays, the
shall relieve Contractor of its duty contract should specify a
to perform this Contract in reasonable timeframe in which
accordance with the terms of the the extension must be granted.
Contract Documents, or give rise to
any right to damages of any kind or • Language that provides
nature from Owner. Contractor “equitable adjustment” for
expressly acknowledges and owner-induced delays.
agrees that it shall receive no
damages for delay. Contractor’s “Contractor shall be entitled to
sole remedy against Owner for equitable adjustments in Contract
delay shall be the right to seek an Price and Contract Schedule in
extension in the Contract the event Contractor is delayed or
Schedule. Granting of any such impacted due to acts by Agent,
time extension shall not be a Owner, or third parties under
condition precedent to this no Agent or Owner’s control at the
damages-for-delay provision. This work site or by changes in laws or
no-damages-for-delay provision regulations that are made
shall apply to claims for early following the execution of this
completion, as well as claims Contract.”
based on late completion. It is
expressly acknowledged and
agreed to by Contractor that a
material inducement to Owner to
enter into this Contract is this no-
damage-for-delay provision.”

10
 2. Consequential Damages
• ISSUES: Owners have more to lose/owners have more to gain, reasonable foreseeability, reasonable
certainty, liquidated damages, home office overhead, limits of liability, specific events v. “catch-all”
phrases, insurance…

Favors Buyer Compromises Favors Seller

• If there is • Language that contains a mutual waiver • Language that waives the owner’s
no language with the contractor responsible to right to consequential damages,
addressing the owner for performance and delay but allows the contractor to collect
consequential liquidated damages. These liquidated its consequential damages.
damages, the damages may cover loss of profit and
contractor is loss of product and should capture • AIA mutual waiver language
put at a high reasonably estimated damages. that allows the owner to collect
disadvantage. In Regarding the magnitude of liquidated liquidated direct damages only.
some projects (i.e., damages, consideration should However, by nature liquidated
casino, power, be given to ensuring incentive for damages are used to estimate
semiconductor) performance while making allowance indirect or special damages
an owner’s for the contractor to remain solvent if (consequential damages) not
consequential the liquidated damages are assessed. known at the time the contract
damages can Also, insurance should be sought to is executed. Therefore, this
reach millions of provide limited liability protection to ambiguous language may be
dollars a day. the contractor. The language below construed to eliminate liquidation
also does not disallow the contractor to of consequential damages for the
• Language that collect extended home office overhead owner.
specifically costs.
states that the “The Contractor and Owner waive
owner will be “Except to the extent that liquidated Claims against each other for
allowed to collect damages provided for in the Contract, consequential damages arising out of
consequential Owner and the Contractor waive all claims or relating to this Contract. This mutual
damages against each other for consequential waiver includes: (1) damages incurred
(regardless of if damages. By way of illustration, but not by the Owner for rental expenses, for
the contractor limitation, consequential damages losses of use, income, profit,
is also allowed includes: (1) Owner’s loss of profit, financing, business and reputation,
to collect its economic loss, loss of reputation, loss of and for loss of management or
consequential goodwill, loss of revenue, business employee productivity or of the
damages). interruption, arising out of or related to the services of such persons; and (2)
Contract Documents, and (2) Contractor’s damages incurred by the Contractor
loss of profit, economic loss, loss of for losses of financing, business and
reputation, loss of goodwill, loss of reputation, and for loss of profit except
revenue, loss of financing, increased anticipated profit arising directly from
financing costs, business interruption, and/ the Work. This mutual waiver is
or loss of management or employee applicable, without limitation, to all
productivity or of the increased cost of the consequential damages due to either
services of such management or employee party’s termination in accordance with
productivity arising out of or related to all Article 14. Nothing contained in this
of the Contract Documents. Nothing herein Subparagraph 4.3.10 shall be deemed
shall be construed to limit Contractor’s to preclude an award of liquidated
liability for damages for third party claims direct damages, when applicable, in
that may be asserted against the accordance with the requirements of
Contractor or Owner, including bodily the Contract Documents.”
injury or damage to tangible property
(AIA: A201-1997,¶4.3.10 – With the
arising out of, results from, or related to the
phrase “for principal office expenses
negligence, errors or omissions or services
including the compensation of
provided by Contractor.”
personnel stationed there” deleted)

11
 3. Indemnity
• ISSUES: Worker’s compensation, broad-form clauses, intermediate clauses, comparative clauses, active
and passive negligence, statutes (Illinois’ Scaffold Act), public policies, insurance, Owner-Controlled
Insurance Programs, Contractor-Controlled Insurance Programs…

Favors Buyer Compromises Favors Seller

• “Broad-form” language that requires indemnification • The best • This type of

for the owner even if the owner is solely negligent and compromising clause would be
the contractor has “zero” negligence. In other words, language would an intermediate or
the event could be caused in whole or in part by the specify “knock- broad-form clause
owner’s negligence, but the owner would still be for-knock” for drafted in the favor
indemnified. the people piece, of the contractor.
possibly with
“The Contractor agrees to indemnify and hold harmless limitations, except
the Owner, its officers and agents, against any claim for in the case of gross
injury or damage to persons, corporations or property negligence or willful
arising out of the performance of the work on the Project, misconduct. Also,
regardless of whether the injury or damage is caused in the contractor’s
whole or in part by the act or negligence of the Owner, its liability for damage
officers or agents.” to the owner’s
existing property
• “Intermediate” language that requires the contractor
should be capped
to indemnify the owner unless the injuring event is
except in the case of
caused by the sole negligence of owner. Therefore,
gross negligence or
if the owner is 99% at fault, the contractor must still
willful misconduct.
indemnify the owner completely.
Lastly, the
“To the fullest extent permitted by law, Contractor shall contractor’s third-
protect, defend, indemnify, and hold harmless Owner, its party liability should
agents, employees, subsidiaries, consultants (including be capped, except
the AE), representatives, shareholders, directors, officers in the cases of gross
and each of them (collectively “Owner Indemnitees”), negligence or willful
from and against any and all claims, damages, losses, misconduct.
costs, and expenses (including reasonable legal,
• An Owner-Controlled
accounting, consulting, engineering, and investigatory
Insurance Program
costs and other expenses) that arise out of or relate to
or Contractor-
any act or omission by Contractor or any Subcontractor
Controlled Insurance
or any employee, officer, agent, representative, or
Program would
consultant of any of them, that results in personal injury
both constitute
(including bodily injury), death, or property damage
as a compromise
irrespective of proportional fault, except to the extent that
accounting for
such claims, damages, losses, costs, and expenses are
indemnification
caused by the sole negligence of Owner.”
concerns.
• “Intermediate” language that provides indemnification
for the owner and contractor from the subcontractor.
Subcontractor must fully indemnify even if the event
is caused in part by the owner and/or contractor. No
indemnification is provided if the event is caused by
the willful misconduct or sole negligence of the owner
or contractor. The same contract provides NO mutual
indemnification for the subcontractor.

12
 3. Indemnity (continued)
Favors Buyer Compromises Favors Seller

“SUBCONTRACTOR hereby releases and shall indemnify,

defend and hold harmless CONTRACTOR, OWNER and
their subsidiaries and affiliates and the officers, agents,
employees, successors and assigns and authorized
representatives of all the foregoing from and against any
and all suits, actions, legal or administrative proceedings,
claims, demands, damages, liabilities, interest, attorney’s
fees, costs, expenses, and losses of whatsoever kind or
nature in connection with or incidental to the
performance of this subcontract, whether arising before
or after completion of the Work hereunder and in any
manner directly or indirectly caused, occasioned, or
contributed to in whole or in part, or claimed to be
caused, occasioned or contributed to in whole or in part,
by reason of any act, omission, fault or negligence
whether active or passive of SUBCONTRACTOR, its
lower-tier suppliers, subcontractors or of anyone acting
under its direction or control or on its behalf.

The foregoing shall include, but is not limited to,

indemnity for:
1. Property damage and injury to or death
of any person, including employees
of CONTRACTOR, OWNER, or
SUBCONTRACTOR.
2. The breach by SUBCONTRACTOR of any
representation, warranty, covenant, or
performance obligation of this subcontract.

SUBCONTRACTOR’S aforesaid release, indemnity and

hold harmless obligations, or portions or applications
thereof, shall apply even in the event of the fault or
negligence, whether active or passive, or strict liability of
the parties released, indemnified or held harmless to the
fullest extent permitted by law, but in no event shall they
apply to liability caused by the willful misconduct or sole
negligence of the party released, indemnified or held
harmless.

SUBCONTRACTOR specifically waives any immunity

provided against this indemnity by an industrial insurance
or workers’ compensation statute.”

13
 4. Ambiguous Acceptance Criteria
• ISSUES: Guaranteed maximum price (GMP) v. cost-reimbursable, performance v. prescriptive
specifications, adequate definitions of mechanical completion, substantial completion, and contract or
final completion, patent ambiguities, reasonable interpretations, Contra Proferentem, reliance…

Favors Buyer Compromises Favors Seller

• Language may • Language that states that the contractor shall construct • Language that
specify that the and deliver the work “in accordance with the contract is looser than
contractor should specifications.” This makes the contract documents “in accordance
perform until the the “approving” party. with the contract
work is “deemed specifications.” For
acceptable by • Generally speaking, when acceptance criteria language example, “when
owner.” is well-defined, every party benefits. The contractor the contractor
benefits because it feels that it has something at stake, deems the work
• Language may and the owner benefits because it has assurance that it acceptable or
specify that will get what it pays for. complete.”
acceptance
will occur when • Acceptance criteria that cannot be measured should • Language that
the work is “to be avoided. Relative and qualitative terms such as states that after
the owner’s “good” or “acceptable” should not be used. the contractor
satisfaction” or installs its work
• The terms “mechanical completion,” “substantial
“fit for purpose.” its contractual
completion,” “contract or final completion,” and
These types responsibilities
“final acceptance” should always be defined in an
of acceptance are complete.
unambiguous, measurable manner.
phrases are This rarely occurs,
especially • Language should be inserted that states that an because it is bad
troublesome in unqualified acceptance of work under the construction business, and
lump sum or GMP contract will prevent an owner from recovering the cost no owner will
contracts because of remedying defective work, but acceptance with the accept this type of
the owner may understanding that certain defects or deficiencies will language.
continue to delay be corrected will not bar recovery.
acceptance by • For process-
using the punchlist • In process-oriented work, language should specify the oriented work,
to its advantage “performance” that needs to be achieved (performance language that
– thus eating away specifications) by the completed product. For example, omits performance
at the contractor’s no more than X parts per million of carbon dioxide testing
profit. However, in a should be produced as a by-product of some sort of requirements.
cost-reimbursable process. If the specific output requirements are not For example, if
contract, if the met, the contractor should be contractually required a mechanical
owner is going to to pay liquidated damages based on the “gap” in contractor puts in
require additional efficiency of the process; however, the contract pipes, but is not
efforts to be made should specify an extended testing period before required to leak
before acceptance performance liquidated damages are assessed. This test them.
is rewarded; the gives the contractor a chance to correct defects at its
contractor will own cost. When a performance specification is not
most likely be paid met in a design-build contract, the contractor should
unless there is be required to redesign at its own cost until it meets
some other issue the performance criteria. Note: if the work involves
present that causes owner-specified new or unfamiliar technology, refer to
the owner to assert the “new or unfamiliar technology” contract language
that the contractor table. The risk of performance of owner-specified
performed the work new or unfamiliar technology should remain with the
negligently the first owner as long as the technology was constructed with
time. appropriate, quality means and methods.

14
 5. New or Unfamiliar Technology
• ISSUES: Means and methods, intellectual property, acceptance provisions…

Favors Buyer Compromises Favors Seller

• Language that shifts the • Language that keeps the risk • Language that holds the owner
responsibility of performance of the piece of equipment responsible for the success of
of an owner-owned/specified functioning correctly (output) new or unfamiliar technology
piece of equipment onto the on the owner, while the that the contractor chooses to
contractor. For example: (i) contractor is responsible use in its means and methods.
the owner specifies a “black for the installation of the
box” on a project and only equipment (input) according to
the owner understands its the design documents.
function, (ii) the contractor is
responsible for connecting • However, if the new technology
pipes to the “black box,” and (iii) pertains to the contractor’s
the contract language shifts the means and methods, the
risk of output of the “black box” contractor should retain the
onto the contractor (who only risk.
constructed the input) – this is
inappropriate allocation.

15
 6. Force Majeure
• ISSUES: Time only v. time and money, foreseeability, reasonable efforts/due diligence, burden of proof,
definition of triggering events, impacts of events, relief (suspension, termination), insurance, “catch-all”
phrases v. specific events, time limits before cost recovery, notice provisions, time-is-of-the-essence
clauses…

Favors Buyer Compromises Favors Seller

• If the contract is silent regarding Force • First and foremost, Force Majeure • Language
Majeure, but contains a time-is-of-the- triggering events should be clearly, that gives the
essence clause. See “No Damages for unambiguously defined. contractor time,
Delay” language under Favors Owner money, and
column. Language provides time relief • Compromising language will termination rights
as the sole remedy to the contractor for provide “equitable adjustment” without limitations.
any delays. for unavoidable costs incurred
by the contractor during delays • Language that
• AIA language that favors the owner caused by Force Majeure events. gives time and
by giving the architect control of time These unavoidable contractor money relief and
extensions, and making weather related costs include rental equipment and specifies that
(Force Majeure) claims very hard for the management salaries. Recoverable the contractor
contractor to prove (i.e. documentation damages should not be limited to must bear the
required to show that weather events the damage of physical property. first $XXX,XXX
are abnormal, not foreseeable, and Indirect damages should also be of a Force
have an impact on construction). recoverable and clearly defined, Majeure event,
possibly with limitations. Rebuild with not more
“If the Contractor is delayed at any time in should be covered by Builder’s than $XXX,XXX
the commencement or progress of the Risk Insurance. expended by
Work by an act or neglect of the Owner or the contractor
Architect, or of an employee of either, or of • Compromising language will for all Force
a separate contractor employed by the attempt to include both time Majeure events
Owner, or by changes ordered in the Work, and money compensation, with cumulatively.
or by labor disputes, fire, unusual delay in possible limitations. Often the cost If after these
deliveries, unavoidable casualties or other recovery is limited to the direct cost limits the owner
causes beyond the Contractor’s control, or of the delay and certain overhead delays in paying
by delay authorized by the Owner pending items but will not include profit. In the contractor
mediation and arbitration, or by other the alternative, limiting language for the Force
causes which the Architect determines could incorporate a cost recovery Majeure impacts,
may justify delay, then the Contract Time only after a certain number of the contractor
shall be extended by Change Order for days of Force Majeure have been may terminate
such reasonable time as the Architect may encountered. Such a “deductible” the contract
determine.” allows both parties to share a set (after X number
(AIA: A201-1997,¶8.3.1) known-unknown risk, but does of days of non-
not put the contractor at risk for payment). Note:
“If adverse weather conditions are the extreme or catastrophic risk that This language
basis for a Claim for additional time, such places its business in imminent may be viewed as
Claim shall be documented by data jeopardy. a compromise if
substantiating that weather conditions
the project is very
were abnormal for the period of time, • Language that provides time relief
large in scope
could not have been reasonably to the contractor if a “workaround”
and is located
anticipated and had an adverse effect on cannot be developed and money
in an area highly
the schedule construction.” relief to the extent of impact not
susceptible to
(AIA: A201-1997,¶4.3.7.2) covered by insurance or included in
Force Majeure
the “Contract Price” (contingency).
events.

16
 6. Force Majeure (continued)
Favors Buyer Compromises Favors Seller

• Language that restricts recovery to time only. “Should the progress, performance
or completion of any portion of the
“Contractor agrees that its sole remedy for Work contemplated by this
delays of any duration resulting from Force Contract be delayed as the result
Majeure, shall be an extension of time, which of catastrophic flood, hurricane
extension shall be documented by Change (including hurricane readiness in
Order.” accordance with the PROJECT
NAME facility on-site hurricane
• Language that provides time relief only for
preparation standards), tornado,
a subcontractor. Furthermore, it requires
windstorm which impacts the Work
very stringent notice requirements be met in
or delays the Work for safety
order to pursue a time extension. Anytime
reasons, earthquake, fire or other
an absolute timeframe is put in to place that
similar catastrophe; or as the result
denies or waives a right, the drafting party is
of Acts of God, the public enemy,
unfairly benefited. The statute of limitations
terrorists, Acts of the Government;
is 5 or 10 years and here the drafter gives 7
or epidemics, quarantine
days.
restrictions, strikes (other than of or
“If SUBCONTRACTOR’S performance of this against Contractor), freight
subcontract is prevented or delayed by any embargoes or other casualty which
unforeseeable cause, existing or future, which is is not in the normal course of
beyond the reasonable control of the parties and business for Contractor and for
without the fault or negligence of which the Contractor is not
SUBCONTRACTOR, SUBCONTRACTOR shall, responsible (a “Force Majeure
within twenty-four hours of the commencement Event”); the time of completion of
of any such delay, give to CONTRACTOR written the portion of the Work directly
notice thereof and within seven (7) calendar days affected by such delay, shall upon
of commencement of the delay, a written timely written request of the
description of the anticipated impact of the Contractor, be extended by a
delay on performance of the Work. Delays period commensurate as defined
attributable to and within the control of below with time lost on the
SUBCONTRACTOR’S suppliers or Substantial Completion Date if a
subcontractors of any tier shall be deemed reasonable workaround cannot be
delays within the control of SUBCONTRACTOR. developed by the Parties which
Within seven (7) calendar days after the mitigates any delay or additional
termination of any excusable delay, costs.
SUBCONTRACTOR shall file a written notice
If a Force Majeure Event will
with CONTRACTOR specifying the actual
increase Contractor’s cost for the
duration of the delay. Failure to give any of the
performance of the Work,
above notices shall be sufficient ground for
Contractor will be entitled to an
denial of an extension of time. If CONTRACTOR
equitable adjustment of the
determines that the delay was unforeseeable,
Contract Price to compensate
beyond the control and without the fault or
Contractor for its actual additional
negligence of SUBCONTRACTOR,
costs reasonably incurred due to
CONTRACTOR will determine the duration of the
the Force Majeure Event, to the
delay and will extend the time of performance of
extent and amount not covered by
this subcontract by modifying the Special
insurance and not already included
Condition titled “COMMENCEMENT,
in the Contract Price. Contractor
PROGRESS AND COMPLETION OF THE
will use all reasonable efforts to
WORK” accordingly. Such extension shall be the
mitigate the effects of any Force
sole remedy for the delay.”
Majeure Event.”

17
 7. Schedule Acceleration
• ISSUES: Notice provisions, mandated acceleration, constructive acceleration, recovery acceleration,
control of recovery plans, liquidated damages as direction to accelerate, excusable delays v. non-
excusable delays, ownership of float, expert testimony/studies, time extension requests, owner response
time for determining if a delay is excusable, burden of proof of lost productivity, causation, liability,
resultant injury…

Favors Buyer Compromises Favors Seller

• Language that specifies that the contractor should • Language that gives • Language that
do whatever it takes to get the job done on time the contractor its direct allows the
(regardless of the circumstances) using its own costs and a portion of contractor to
“means and methods.” If the required “means indirect costs and profit recover its profit
and methods” happen to include acceleration, the for the accelerated work and direct and
contractor is responsible for its extra costs. when the acceleration indirect costs
is mandated or for mandated
• Language that either gives the contractor no constructive. Similar to or constructive
compensation, or direct costs only for mandated or the “Cumulative Impact acceleration.
constructive acceleration. The example language of Change Orders,” a In essence,
below allows direct costs only. good compromise might the contractor
establish an unbiased gets “Time
“Even if Contractor’s work is otherwise in compliance
“project neutral” expert & Materials”
with the Project Schedule, Owner may, at any time,
on acceleration impacts costs for the
direct Contractor in writing to accelerate the Work and
to apply a certain model accelerated
to perform additional shifts or overtime and provide
or method to quantify work. Although
additional equipment. In this event, Owner’s sole
impacts. uncommon,
liability to Contractor shall be to pay Contractors actual
language that
direct costs related to the acceleration. Any adjustment • Compromising language allows the same
in the Contract Price for Owner’s voluntary acceleration should also specifically compensation
of the Work shall be implemented by Change Order.” set out what type of for recovery
documentation the acceleration
• Language that forces acceleration by overmanning
contractor is expected would clearly
(with no means of recovery) if the contractor fails
to keep in order to prove also favor the
to meet milestones. The milestone mention is
causation, liability, and contractor.
especially troubling because a contractor may fail to
resultant injury of the
meet the first milestone and be forced to accelerate
mandated or constructive
when it actually may have been on pace to finish
acceleration. The
the entire project early or on time. The inability of
recovery plan for
the contractor to meet early milestones may not
acceleration should
necessarily mean that the contractor is on pace
also be agreed upon
to finish late. The milestones may have just been
by both parties in a
inaccurately scheduled. Note: Elsewhere in the
compromising contract.
contract, overmanning compensation is allowed if it
is necessitated and approved by the owner due to • If the acceleration is
an increase in the scope of work via a change order. recovery acceleration,
the contractor should
“Should Contractor fail to achieve one or more
be held responsible for
milestones by the projected date(s), Contractor
its extra costs and the
expressly agrees that it will add a sufficient number of
recovery plan should be
qualified and experienced personnel to its design and/
agreed upon since the
or construction management staff, as required, to
owner may have to pay
recover the projected schedule and shall not seek
more labor expenses
reimbursement from Owner for such personnel even
to increase its safety
though they may be added to Contractor’s manloader.”
inspectors on site.

18
 8. Cumulative Impact of Change Orders
• ISSUES: Cardinal change, abandonment, constructive change, waivers, reservations, causation, liability,
resultant injury, burden of proof, expert testimony/studies, altered working conditions, foreseeability,
accord and satisfaction, notice provisions, clause ambiguity, lack of consideration, performance, or
authority; unilateral or mutual mistake, misrepresentation, duress, coercion…

Favors Buyer Compromises Favors Seller

• Language that explicitly waives the right • Language that allows the • Language that
of the contractor to impact costs and contractor to submit cumulative specifies a fixed
damages related to the execution of impact claims that can display schedule of
change orders. The language specifies causation, liability, and resultant compensation
that the contractor should account injury. A good compromise for changes. For
for any impacts in the change order might establish a “project example, the
submittal. This effectively cuts off any neutral,” unbiased expert on contractor may try
ability for the contractor to bring a claim cumulative impacts to apply to draft language
for cumulative impact (unless reservation a certain model or method that awards the
language is inserted). The justification for to determine if cumulative contractor a
this language is that the owner does not impact occurred and to what fixed amount of
want to be blindsided by a cumulative extent the contractor should be compensation for
impact claim at the end of a project. compensated. Compromising every “X” number
Unfortunately, cumulative impact is not language could also of changes or
usually recognizable until the later stages specifically set out what type of disruptions to its
of a project. documentation the contractor work to account
is expected to maintain in order for the cumulative
“Execution of a Change Order by to prove causation, liability, and impact.
Contractor, or acceptance of payment by resultant injury to the owner.
Contractor constitutes waiver and release of • Language that allows
all direct, indirect, consequential and impact • Some contractors consider it the contractor to
costs and damages related to, or resulting a compromise when language fully recover its
from, that Change Order, and its effect, if specifies that reservations cumulative impacts
any, on unchanged work, including, but not of rights are “OK” only if the after a certain
limited to, jobsite overhead, home office contractor cannot ascertain amount (%) of
overhead, interest or carrying charges on the cumulative impact of a change has occurred
Contractor’s investment, expenses arising certain change by its “good- on the project.
from cost of capital, or for loss of use of, or faith” efforts. Furthermore, if
under-utilization of labor, equipment or the contractor then wants to
facilities. The execution of each Change file for a cumulative impact
Order, or acceptance of payment by that includes that particular
Contractor shall constitute a full and change order, the contractor
complete settlement for all claims must let the owner know of
Contractor may have against Client, for any its intention to do so within
damages and/or increased costs as a result X days of the change. Some
of any delay, acceleration, hindrance, contractors may take issue
disruption, inefficiency, or other interference with this, since research shows
related to the Change Order and all previous that the total cumulative impact
Change Orders. In estimating the effect of cannot be known until late in
changes upon the cost of its Work and the project after many “single”
Contract Schedule, Contractor shall ensure changes have synergistically
that it has properly accounted for all cost caused a cumulative impact. By
and time impacts and shall not later make definition, the cumulative impact
any claim for reimbursement of impact is from multiple or cumulative
costs allegedly resulting from the number, change orders, not singular
nature or extent of Change Orders.” change orders.

19
 8. Cumulative Impact of Change Orders (continued)
Favors Buyer Compromises Favors Seller

• Language that disallows the contractor

to file for impact costs related to change
orders after the change order is signed.
This puts the burden on the contractor
to try and anticipate all of the impacts
that each change will have on the work
directly or indirectly. This is difficult,
since the cumulative impact of change
orders usually cannot be known until the
conclusion of the project.

“For any Change Order which warrants an

addition to or deduction from the Contract
Price or Project Schedule, the Owner and
the Contractor shall execute a written
Change Order, in a form to be provided by
the Owner, and the Contractor’s signature
thereon shall constitute acceptance of the
change in price and/or schedule, and
acknowledgement that said change in price
and/or schedule represents full
compensation for all costs associated with
the Change Order, including delay costs,
impacts, acceleration, inefficiency,
disruption, consequential damages, and any
other cost of any nature or type.”

20
 9. Owner-Mandated Subcontractors
• ISSUES: Due diligence, owner-approved lists, contractor nominations, minority and women-owned
businesses…

Favors Buyer Compromises Favors Seller

• Language that • If an owner provides a contractor with • Language that

specifically mandates a list of owner-approved (“mandated”) allows the contractor
subcontractors and bars subcontractors, the owner should allow to contract with
the contractor its “due the contractor to nominate other qualified any subcontractor
diligence” rights. subcontractors to the list. The contractor (absolutely no owner-
should also be given “due diligence” rights control in selection
to review the subcontractor list and make of subs). In other
its selection based on the merits of the words, the contract
subcontractors. Once this is done, there is silent regarding
has been a mutual agreement. In a lump “mandation” of specific
sum contract, the only risk remaining is subcontractors.
if the contractor has been lazy with its
“due diligence” and ends up with a poor
performing subcontractor. In a cost-
reimbursable contract, some of the increased
costs may end up being passed on to
the owner. Regardless, inadequate “due
diligence” can quickly lead to claims and
disputes.

• If the owner mandates specific

subcontractors, the contractor may be
able to compromise if: (i) it requests the
difference in pricing between the bid of a
mandated subcontractor and the lower bid
of an un-mandated subcontractor that the
contractor would have used (this is only if the
mandated sub’s price is more expensive than
the contractor-selected sub’s price), or (ii) if
it expressly limits its liability concerning the
mandated subcontractor’s performance.

• Language that does not mandate the

use of specific subcontractors, unless
such a practice would be “practical.” The
language states that the subcontractor
shall support the owner’s and contractor’s
policy to utilize small, minority, and women-
owned businesses. No real mandation,
just encourages a cooperative working
relationship.

“SUBCONTRACTOR shall support

CONTRACTOR’S and OWNER’S policy and
commitment to maximizing, where practical,
business opportunities for small, minority and
women owned business enterprises (as
identified in the Glossary appended to these
General Conditions) by actively identifying,
encouraging and assisting in their participation.”

21
 10. Insurance Allocation
• ISSUES: Liability of “Builder’s Risk” events, premiums potentially increasing, gaps in coverage,
“difference in conditions” insurance, due diligence, Owner-Controlled Insurance Programs, Contractor-
Controlled Insurance Programs, allocation of deductibles, “additional insured”…

Favors Buyer Compromises Favors Seller

• Language that specifies that • Owner purchases the Builder’s • Owner is responsible for
the contractor will obtain the Risk policy (or is self-insured), obtaining the Builder’s
Builder’s Risk policy, name or another party buys the Risk policy, and the owner
the owner as “additional policy and passes the costs is responsible for the
insured” without qualification, to the owner. The deductibles deductibles. The contract
and be responsible for the are either shared based on would also hold the contractor
deductibles (deductibles are the negligence of the parties harmless for events covered by
difficult to account for in a bid, (determined by good faith the insurance, and name the
so the contractor may become discussion), or the contractor contractor as an “additional
uncompetitive or financially is given a fixed portion of the insured.”
distressed). deductibles that it must pay.
This gives the contractor a
• Language that specifies that the stake in preventing Builder’s
owner will obtain the insurance, Risk events (if at all possible).
but will not be responsible for This fixed deductible amount
gaps in the insurance, while the must be a reasonable amount
contractor is not allowed “due that can actually be born and
diligence” to investigate the survived by the contractor.
gaps.
• The contractor should also
be able to look at the gaps
in insurance, so that it is
able to purchase “difference
in conditions” insurance if
necessary. Furthermore, any
Builder’s Risk insurance policy
should have the contractor
named as “additional insured.”
It may also prove useful to
provide an incentive (reward/
bonus) to the contractor if
no claims occur. This will
encourage the contractor
to act “defensively” when
it comes to preventing
insurance losses if at all
possible. All of these factors
should be considered to
establish a compromising
situation that optimizes
insurance for project-specific
circumstances.

• An Owner-Controlled or
Contractor-Controlled
Insurance Program may satisfy
the contracting parties as an
equitable compromise.

22
 11. Differing Site Conditions
• ISSUES: Which party determines the “equitable adjustment,” site inspections, special conditions
clauses, notice provisions, differing site conditions clearly defined, foreseeability, Type I & II
conditions, notice requirements, reasonable certainty, duty to disclose, impossibility, mutual mistake,
misrepresentation, fraud, breach of implied warranty, review and reliance…

Favors Buyer Compromises Favors Seller

• The contract is silent regarding differing • Language that specifies that if • Language
site conditions. differing site conditions occur, the that
contractor will be “equitably adjusted” excludes
• Language that pushes all the risk to the for both time and money. The differing the
contractor by giving it access to the site, site condition should be something contractor’s
and telling it to rely on its own investigation that the contractor could not have liability
(or no site access is granted at all). foreseen. However, this determination when
should not be independently made by there is
• Language that gives the owner supreme
the architect or the owner. If there is insufficient
control over determining whether or not
a disagreement as to whether or not time/effort
the contractor is entitled to an equitable
a differing site condition is present, available to
adjustment to its contract time or price.
the disputes provisions should investigate
“Different or Concealed Conditions. If specify a third-party to settle the site
Contractor (i) encounters or discovers dispute. The sample language below conditions
conditions that differ from those reasonably is almost identical to the first example sufficiently.
anticipated after Contractor’s examination of of “Favors Buyer” language, except Language
the Site and diligent examination of reference the determination of the differing site will also
information made available to Contractor, (ii) condition is made by both parties - exclude
encounters concealed conditions existing then a third party if no agreement can contractor
below the surface of the ground, (iii) be made. If a differing site condition is liability for
encounters conditions in an existing structure determined to exist, the owner must any gaps
that are at variance with the conditions grant an equitable adjustment to the that may
indicated by the Contract Documents, (iv) contract (time and money). exist in
discovers materials that are or that it existing site
reasonably believes are Hazardous Materials condition
that are not controlled or have not been reports.
rendered harmless, (v) encounters a condition
that is or that it reasonably believes is a
Wetland Condition that is not protected, or (vi)
encounters items or a circumstance that is or
that it reasonably believes is a Native
American Archaeological Site that is not
protected, Contractor shall immediately notify
Owner and cease performance of the Work in
that area of the Project where any such
condition or circumstance is encountered.

23
 11. Differing Site Conditions (continued)
Favors Buyer Compromises Favors Seller

Protective Actions. Upon ceasing the Work, or “Different or Concealed Conditions. If

upon discovery of any occurrence or condition Contractor (i) encounters or discovers
that constitutes or reasonably could constitute conditions that differ from those
an immediate danger to persons, property or reasonably anticipated after Contractor’s
the environment, the Contractor shall take examination of the Site and diligent
such emergency actions as are reasonably examination of reference information
necessary to contain any suspected made available to Contractor, (ii)
Hazardous Materials or limit their effects, to encounters concealed conditions existing
protect the suspected Wetland Condition or below the surface of the ground, (iii)
the suspected Native American Archeological encounters conditions in an existing
Site, or to otherwise minimize the danger, shall structure that are at variance with the
take such temporary measures as are conditions indicated by the Contract
reasonably necessary to secure the involved Documents, (iv) discovers materials that
area of the Project site from further are or that it reasonably believes are
disturbance. The Contractor shall not resume Hazardous Materials that are not
the Work in the affected area until it has controlled or have not been rendered
received a written order from Owner to do so. harmless, (v) encounters a condition that
is or that it reasonably believes is a
Owner to Review. Owner will promptly review Wetland Condition that is not protected,
the condition and determine the extent, nature or (vi) encounters items or a circumstance
and scope of the condition. that is or that it reasonably believes is a
Course of Action. If Owner determines that the Native American Archaeological Site that
condition(s) could not have been discovered is not protected, Contractor shall
by Contractor through information available to immediately notify Owner and cease
Contractor, they do differ materially from the performance of the Work in that area of
anticipated condition, and would cause an the Project where any such condition or
increase or decrease in the Contractor’s cost circumstance is encountered.Protective
or time to perform the Work, Owner shall Actions. Upon ceasing the Work, or upon
determine a course of action and may: (1) discovery of any occurrence or condition
undertake mitigation activities or other acts as that constitutes or reasonably could
its deems appropriate; (2) terminate or modify constitute an immediate danger to
the Contract in accordance with its terms; or persons, property or the environment, the
(3) make an equitable adjustment by a Change Contractor shall take such emergency
Order to the Contract.” actions as are reasonably necessary to
contain any suspected Hazardous
Materials or limit their effects, to protect
the suspected Wetland Condition or the
suspected Native American Archeological
Site, or to otherwise minimize the danger,
shall take such temporary measures as
are reasonably necessary to secure the
involved area of the Project site from
further disturbance. The Contractor shall
not resume the Work in the affected area
until it has received a written order from
Owner to do so.

24
 11. Differing Site Conditions (continued)
Favors Buyer Compromises Favors Seller

• AIA language that gives control to the DSC Review. Owner and Contractor will
architect to determine if a differing conjunctly review the condition and
site condition is present and what the determine the extent, nature and scope of
adjustment in cost and time should be. the condition. If the Owner and Contractor
Courts will enforce the architect’s decision cannot agree, a pre-selected “project
unless proven malicious. neutral” will determine if differing site
conditions exist.
“If conditions are encountered at the site
which are (1) subsurface or otherwise Course of Action. If the condition(s) could
concealed physical conditions which differ not have been discovered by Contractor
materially from those indicated in the Contract through information available to
Documents or (2) unknown physical Contractor, they do differ materially from
conditions of an unusual nature, which differ the anticipated condition, and would
materially from those ordinarily found to exist cause an increase or decrease in the
and generally recognized as inherent in Contractor’s cost or time to perform the
construction activities of the character Work, Owner shall make an equitable
provided for in the Contract Documents, then adjustment by a Change Order to the
notice by the observing party shall be given to Contract.”
the other party promptly before conditions are
disturbed and in no event later than 21 days
after first observance of the conditions. The
Architect will promptly investigate such
conditions and, if 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 an equitable adjustment 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 so notify the
Owner and Contractor in writing, stating the
reasons. Claims by either party in opposition
to such determination must be made within 21
days after the Architect has given notice of the
decision. If the conditions encountered are
materially different, the Contract Sum and
Contract Time shall be equitably adjusted, but
if the Owner and Contractor cannot agree on
an adjustment in the Contract Sum or
Contract Time, the adjustment shall be
referred to the Architect for initial
determination, subject to further proceedings
pursuant to Paragraph 4.4.”
(AIA: A201-1997,¶4.3.4)

25
 12. Design Responsibility
• ISSUES: Implied warranty (Spearin Doctrine), duty to inspect/review, reliance, express warranties (fit for
purpose work), insurance, prescriptive v. performance specifications, patent errors/defects…

Favors Buyer Compromises Favors Seller

• Language that holds the contractor • Language that requires the • Language that
liable for damages if they would have contractor to use reasonable is in accordance
been prevented if the contractor had care in reviewing the design with the Spearin
performed a contract document and documents and to report any Doctrine. This
design review with field verification defects or errors noticed. language attempts
measurements to verify existing site However, the language expressly to remove all liability
conditions. waives any liability for a claim for design errors
arising out of the contractor’s and omissions from
“Before beginning each component of the failure to discover design defects the contractor, even
Work, Contractor shall carefully study and or errors. This encourages the if the contractor
compare the Contract Documents contractor to check the plans happens to know
(including the Drawings and Specifications) thoroughly with no fear of that there is an error
as well as reference documents and liability for defects or errors not or omission in the
information provided by Owner, and shall discovered. design documents.
check and verify pertinent figures therein
and take field measurements of any existing “The Contractor is required to use “The contractor is
Site and existing facility conditions related reasonable care to check any bound to build
to the Work. If Contractor fails to diligently Issued-For-Construction Drawings according to plans and
review and properly consider them, (IFC Drawings) provided by or to specifications
Contractor shall be responsible for costs Engineer or the Owner for any Work prepared by the owner,
and damages caused by its omissions to the or Equipment supplied under this and the contractor will
extent that such costs and damages would Contract for compatibility with the not be responsible for
have been avoided if Contractor had Work. The Drawings shall be marked the consequences of
performed its document review, design clearly with any errors in any defects (patent or
review, and field verification obligations.” compatibility, dated and returned otherwise) in the plans
promptly to the Owner. Preliminary and specifications
• Language that expressly warrants that notice of any correction or under any
the contractor’s work will be: fit for the comments shall in each case be circumstances
purpose intended, of good quality, and sent by the Contractor to the Owner whatsoever.”
free from faults and defects. This type of as soon as possible. Contractor
express warranty has been interpreted expressly disclaims any liability
by some courts as an exception to the arising out of any claim that
applicability of the Spearin Doctrine. Contractor failed to ascertain and/or
These courts have held contractors report any error or omission in the
liable for design errors/omissions that engineering or design of such
manifest themselves in the work of the Drawings.”
contractor.
• With Engineer/Procure/Construct
“Contractor warrants that the Work shall be lump sum work, bid tenders
in accordance with all applicable plans, should be given by the owner
Drawings and Specifications, or to the with adequate time for the
extent not covered by such plans, Drawings contractor to investigate the
and Specifications, in accordance with design. Oftentimes, not enough
applicable professional and industry time is allotted to the contractor
standards, and shall be fit for the purpose to discover deficiencies in the
intended, of good quality, and free from owner-provided design.
faults and defects.”

26
 13. Waiver of Claims
• ISSUES: Time limits, delay claim waivers v. final releases, Statute of Limitations…

Favors Buyer Compromises Favors Seller

• Common delay claim waivers • Reasonable time limits for • No final waiver of claims and
cause the contractor to lose its delay waivers, and mutual, no time limits on delay claims
right to delay compensation if it equal waiver of claims for final (other than the Statute of
does not provide notice within releases. Limitations).
the contractually specified time
limits. The language below • A more detailed, fair
comes from a contract that compromise for delay claims
gives the contractor a five- would require “prompt” notice
day time limit “or else”... The of impact events, with a
contract gives the contractor written statement of when the
five days from the occurrence quantification of the impact
of the event if it is contractor- can be expected. However, a
initiated, or five days from when maximum time limit should be
the owner provides notification specified for the quantification
if it is owner-initiated. The owner to be submitted by the
is given five days to respond to contractor. This time limit is
a contractor’s notice, but there needed to give the owner
is no contractual penalty if it adequate time to respond
does not. to the claim. This type of
language promotes dialogue.
“Waiver of Claims for Failure to
Provide Notice: CONTRACTOR
HEREBY EXPRESSLY WAIVES ALL
RIGHTS TO ASSERT ANY AND
ALL CLAIMS BASED ON ANY
CHANGE IN THE WORK, DELAY
OR ACCELERATION (INCLUDING
ANY CONSTRUCTIVE CHANGE,
DELAY, SUSPENSION OR
ACCELERATION) FOR WHICH
CONTRACTOR FAILED TO
PROVIDE PROPER AND TIMELY
NOTICE AS REQUIRED BY THIS
ARTICLE XX.”

• Final releases of claims are

appropriate. However, language
that addresses final waivers
may favor the owner if they
don’t allow adequate time to
the contractor to review the
acceptance of the owner.
Fair releases usually specify
that any and all claims must
be submitted within 90 days
after substantial completion is
achieved and approved for and
by the owner.

27
 14. Standard of Care
• ISSUES: Standards ambiguously defined, professional standard of care, ordinary standard of care (tort
negligence), proximate cause, defenses of assumption of risk, contributory negligence, and independent
contractor; Affidavit of Merit, foreseeability, economic loss rule, express duties and warranties…

Favors Buyer Compromises Favors Seller

• Language that specifies that • Language that specifies that • “Generally accepted”
“highest” or “best” industry work should be performed standards.
standards should be used. This in accordance with the plans
gives the owner leverage to be and specifications with
able to point at another similar measurable tolerances defined
project and say, “That is the for the contractor (construction
highest or best standard. You standard of care).
are liable because you did not
reach that standard.” • Language that specifies that
the design be prepared in
accordance with the care,
skill, and diligence that other
professional designers would
ordinarily and reasonably
conduct themselves by in
the same circumstances to
achieve a functional design
product that is promptly
usable (engineering standard
of care).

28
Chapter 3: Legal Research

Introduction
The legal research results are integral to an increased understanding of the respective risks and
the court’s interpretations as to their allocations. In some instances the intervention of a Legislature
will preempt either the precedental value of cases or the ability of parties to allocate risk on their own.
For example, the “Illinois Scaffold Act” effectively renders indemnification clauses unenforceable in
Illinois. Courts sometimes will not prohibit a seemingly oppressively one-sided clause but will require
that the statement of the requirement to be so clear as to leave no doubt as to the parties’ intentions
(this has frequently been the case with indemnity clauses).

Each of the 10 risks listed in Table 2 have been analyzed and are summarized in this chapter.
This implementation resource contains a summary of the legal research only. The legal research
in its entirety, along with all citations of case rulings and decisions relied upon, can be found in
Research Report 210-11. The overall intent of the legal research is to determine how a court would
likely allocate each risk if it is not done so in the contract documents and what types of exceptions
have been established when the risk is included in the contract documents. The highlight of each risk
discussion is the legal issues and considerations flow chart. Each flow chart will aid the parties in
understanding the courts’ viewpoints concerning the risk.

Table 2. The 10 “Hot-Button” Risks Researched

Legal Research Risks

1. No Damages for Delay
2. Consequential Damages
3. Indemnity
4. Ambiguous Acceptance Criteria
5. Force Majeure
6. Schedule Acceleration
7. Cumulative Impact of Change
Orders
8. Differing Site Conditions
9. Design Responsibility
10. Standard of Care

Research and Findings

The research team conducted its legal research by reviewing legal opinions and reviews expressed
in U.S. Federal and state cases from the Lexis Nexis™ database, legal articles, and construction law
books. The attorneys on the research team were also heavily relied upon to provide their expertise
regarding the legal issues and considerations associated with each risk that was researched.

29
 Initially the research team’s hypothesis held that any particular risk is always best allocated to
one certain party regardless of project circumstances. After the data collection, the team concluded
that optimum allocation for any particular risk is not always best allocated to the same party in each
instance, but that it is in fact project-specific. Consequently, the team shifted toward legal research
that could aid contracting parties in determining the optimum allocation of the “hot-button” risks
on each specific project. The team found, however, that only 10 of the “hot-button” 14 risks yielded
readily available, documented legal information. As a result, the research team chose to limit its legal
research scope to the 10 risks that it: (1) had the most success in obtaining legal information for, and
(2) felt that the industry could benefit the most from.

Readers should recognize that each case or legal principle discussed has to be understood
in its totality recognizing that the British and U.S. legal systems are adversarial in nature and not a
Socratic search for the truth. As a result, the specific legal circumstances (i.e., the skills, motivations,
and biases of judges, juries, lawyers, and expert witnesses) may vary greatly from case to case and
thereby result in very different rulings from those discussed herein.

Application of Findings
Through a careful review of the analysis and study of the legal issues and considerations flow
charts, parties should increase their understanding of each of the 10 researched risks. With this
knowledge, along with the information provided by the contract language tables, contracting parties
should then be able to draft more effective risk allocation clauses and more effectively scrutinize
contract clauses that are proposed to them.

1. No Damages for Delay

No damages for delay clauses attempt to shift the risk of delay caused by one party to
another. It can be the owner as to the general contractor (and by virtue of flow-down provisions,
to the subcontractors), or solely by the general to its subs. Time delays can be costly and can
accumulate quickly. By accepting a contract with a no damages for delay clause, the adhering party
greatly increases its risk exposure on a project. If both the owner and the primary contractor on
a project include a no damages for delay clause, a participating subcontractor can essentially be
held responsible for all delay costs that occur on a project, regardless of the source. Because no
damages for delay clauses are responsible for such a large and highly volatile risk transfer, many
legal jurisdictions have carved out exceptions to their enforceability. Among the legal principles that
govern the exceptions that have been carved out by the courts are the following:

1. Owners have an implied obligation in every construction contract to cooperate with the
contractor and to not intentionally interfere with, hinder, or delay performance of the
contractor, and;

2. If damages are foreseeable as a probable result of delay and advanced awareness of the
risk is given to the contractor, the contractor has the responsibility to account for the risk
in its bid price.
 No damages for delay clauses may be enforced by courts unless specific exceptions are present
(“…no-damage-for-delay provisions are valid and enforceable so long as they meet ordinary rules
governing the validity of contracts” see United States v. Metric Constructors, Inc., 480 S.E.2d 447
(S.C. 1997)). Figure 1 generically lays out the allocation of owner-caused delays when this type of
clause is present. It should be noted that the figure depicts what the current legal trends indicate.
Jurisdictions may vary in their rulings regarding the enforceability of no damages for delay clauses
and even different courts within the same jurisdiction may not be entirely consistent. The following
figure (and all others in this chapter) should be used only as an educational tool and not relied upon
to predict how a court or arbitrator will rule.

Delay clearly
foreseeable and/or
specific delay Which party
addressed in clause? assumes the risk?
Identify
contract risk: Yes Contractor
No Damages
for Delay Yes Owner
No Yes
No
Length of delay The owner
Clause is silent justifies an actively
regarding abandonment of ?*interfered?*
additional the contract?
compensation? Yes
No
No Varies**

* Willful acts, bad-faith acts, gross negligence

** Mere negligent interference is not always
seen as an exception to the clause

Figure 1. “No Damages for Delay” Legal Issues and Considerations Flow Chart

If an owner-caused delay occurs and was clearly foreseeable and/or specifically addressed in
the no damages for delay clause, the contractor will assume the consequences associated with the
owner-caused delay. If the delay was not foreseeable and/or addressed in the clause, the next step
is to determine if the clause specifically bars monetary compensation for the owner-caused delay.
Many no damages for delay clauses allow only an extension of time; however, if the clause is silent
or ambiguous regarding monetary compensation, the owner may be held liable for costs incurred by
the contractor. If the clause does state that no additional monetary compensation will be allowed,
the court will then determine if the length of the delay qualifies as an abandonment of the contract
by the owner. If the length of delay does not justify abandonment, the next consideration will be to
investigate if the delay was caused by the owner’s active interference. Active interference includes
willful acts, bad faith acts, and gross negligence. If the owner actively interfered, it will be held liable
for the contractor’s damages. If the owner-caused delay was not due to active interference, some
jurisdictions will still hold the owner responsible if the owner-caused delay was due to the mere
negligence of the owner.

31
 It should also be noted that if the owner refuses to grant a time extension as the sole remedy
when a delay justifies such an extension, the contractor may be able to recover for its time and money
impacts if it is “constructively accelerated” as a result (see “schedule acceleration” legal issues and
considerations flow chart).

2. Consequential Damages
A consequential damages clause either enables or disallows an owner to be compensated for an
indirect loss caused by the contractor, and likewise, enables or disallows the contractor to receive
compensation should indirect losses stemming from the owner’s actions occur. Consequential
damages claims differ, however, from owner to contractor. An owner usually files for consequential
damages caused by a contractor’s breach of contract when the breach causes the owner to lose
use of the final project and the profits that otherwise would have been realized if the breach had not
occurred. A typical contractor claim for consequential damages occurs when the owner’s actions/
inactions cause the contractor to lose potential business or destroy the contractor’s reputation
(sometimes these are referred to as business devastation claims).

Due to the indirect and specialized nature of the losses, the definitions of true consequential
damages are often misunderstood. If a consequential damages clause is not present in a contract,
the common law rule will generally enforce or disallow the damages according to the legal principles
of foreseeability and certainty. The foreseeability principle allows for recovery of consequential
damages if the party in breach of contract could reasonably foresee that a contract breach would
result in the indirect consequential damages to the other party. Certainty requires that damages be
reasonably calculable and not the subject of mere speculation.

Court rulings on consequential damages have been highly variable due to the difficulty in proving
losses with reasonable certainty. As a result, consequential damages waivers are increasingly
common and have thus set some standards of enforcement within the legal community. Traditionally,
contracts for construction of power plants and some other large industrial facilities have eschewed
consequential damages clauses in favor of liquidated damages for late completion.

In summary, several considerations should be made when drafting consequential damages

waivers. Foreseeable losses that are known at the time of contract signing should be specifically
addressed in the waiver. Waivers may contain language that specifies that consequential damages
are waived except for those included in a “liquidated direct damages” provision. This may effectively
disallow the owner from accounting for any consequential damages in its liquidated damages clause,
since there is really no such thing as “direct” liquidated damages. Unfortunately, it is for consequential
damages that liquidated damages provisions are most needed (Sweet, 2004). By definition liquidated
damages are damages which are indirect or consequential which cannot be directly calculated at the
time a contract is entered into (Wallace, 1998).

Theoretically, by including the limitation to “liquidated direct damages” alone, the parties
effectively eliminate liquidated damages altogether. However, it is ambiguous as to what indirect
liquidated damages versus direct liquidated damages can actually be defined as. Owners should be
wary of this type of language in consequential damages clauses. It seems more equitable that the

32
owner would be allowed to account for consequential damages within its liquidated damages, but
that a cap would be specified concerning the damages. However, the cap should be high enough as
to provide an incentive for the contractor to perform.

Figure 2 lays out the allocation of consequential damages awards to any party in situations
involving and lacking a consequential damages waiver. It should be noted that the figure depicts
current legal trends. As such, jurisdictions will vary in their rulings regarding the enforceability or
application of consequential damages clauses.

Consequential
damages waived?

Yes, if court finds that the

damages fall under the
No “catch-all” consequential
Specific damages definition.
damages
addressed
in waiver?
Identify
contract risk: Yes
Yes Yes
Waiver is
Consequential present in
Damages the contract? No Yes
No Damages were No
reasonably
foreseeable by Damages can be
injuring party? proved with
reasonable certainty
Yes by the injured party?

Yes No

Figure 2. “Consequential Damages” Legal Issues and Considerations Flow Chart

First, considering the case where a waiver is included, a waiver with specific examples and a clear
definition of consequential damages is preferred to disallow award of the damages. As such, even if
the event is not listed in the waiver, it can still be ruled a consequential damage if the waiver contains
a “catch-all” consequential damages definition and the court interprets the definition to cover the
damages in question (courts will rely on the concepts of foreseeability and certainty to ascertain the
intentions of the contracting parties). When the event in question is included in the listed events, it will
normally result in a ruling upholding the consequential damages waiver.

If there are not clauses present in the contract that address consequential damages, the legal
principles of foreseeability and certainty become the only judicial guide as there is no contract
language to indicate the intentions of the contracting parties. As previously discussed, if the party
in breach of contract had no reason to foresee that their breach would result in losses to the other
party, then the party in breach is only at fault for breach of contract, and is not responsible for the
consequential damages incurred by the other party. If the party in breach of contract did have reason
to foresee that their actions would result in damages to the other party, however, the losses incurred
must still be proven with reasonable certainty before consequential damages will be awarded.

33
3. Indemnity
Indemnification can be defined as the action by which one contracting party (indemnitor)
holds another party (indemnitee) or parties (indemnitees) harmless for a loss that was caused by
the indemnitor. In other words, if the actions of the indemnitor cause a large loss which may or
may not manifest itself with a lawsuit, the indemnitor will shield the indemnitee from liability for the
loss. Depending on the contract and the legal jurisdiction in question, the indemnitor may also end
up indemnifying the indemnitee even if the loss was caused in whole or in part by the indemnitee.
Indemnity can be provided contractually through express written provisions or non-contractually
through the court’s application of the legal concepts of qualitative (common law indemnity) and
quantitative (doctrine of contribution) comparisons of negligence.

Typically, when a severe personal injury or loss occurs on a construction project that yields legal
action, most every project party is named in the lawsuit so that the injured party will have a higher
probability of collecting its damages. If there are no contractual indemnification clauses that prevent
or allow the shifting of guilt for the event, one of the contributing parties may end up bearing all of
the loss even when other parties contributed to the injury or loss. This may happen out of court when
the party with the “deepest pockets” chooses to absorb the entire loss in order to forgo the costly
legal process, or in the case of litigation, a court may allocate the entire loss to one individual party
through the application of common law indemnity (qualitative comparison of negligence).

When no contractual indemnity provisions exist, the party who pays all of the losses will oftentimes
be interested in recovering some of its losses from the other guilty parties. This reimbursement is
known as “contribution.” Most U.S. courts do not require contribution among wrongdoers (Sweet,
2004). In Johnson v. Chicago & P. Elevator Co., 105 Ill. 462 (1882), the court affirmed that, “There is
no right of contribution between wrong-doers.” However, approximately half of the U.S. states have
implemented some type of contribution statute (Sweet, 2004). These statutes vary from state to state,
but most of the statutes generally specify that a joint tortfeasor (wrongdoer) against whom judgment
is entered is entitled to recover from other joint tortfeasors whose negligence contributed to the
injury. Contribution will only be allowed if the other joint tortfeasors are not protected by workers’
compensation statutes (applicable if a joint tortfeasor is the employer of the injured party).

Indemnity can be provided by express written provisions in a contract or by application of

common law indemnity. In this manner, an offending party may find protection from losses that it
otherwise would have been liable for. The doctrine of contribution among wrongdoers is another
method by which contracting parties can mitigate losses by forcing other wrongdoers to contribute
to the loss. As such, the indemnity legal research efforts focused on differentiating and separately
discussing common law indemnity, contractual indemnity, and contribution among wrongdoers.

Indemnification is a highly complicated contracting issue, and as such, it requires extensive

attention when drafting associated clauses. Each party should investigate their state’s public policies
and/or statutes that regulate indemnification clauses in construction contracts to ensure that a
particular clause will be enforceable as written.

Rulings on requests for indemnity vary depending on the existence of an indemnity clause and
the laws regarding indemnity within a state. Figure 3 outlines the granting of indemnity based on

34
situations regarding contractual and non-contractual indemnities in states that allow indemnification
clauses in some magnitude. Indemnity is a complex issue and the figure attempts to generalize the
common principles regarding the risk. As such, jurisdictions will vary in their rulings regarding the
granting of indemnity.

Contractual
intention of the
parties provides Indemnity
indemnity to provided to
indemnitee? indemnitee?
Clause “expressly”
indemnifies
indemnitee’s sole/ No No
partial negligence? No
Yes Yes
No
Indemnification
clause present? Yes No
Broad / Sole/partial
Intermediate- negligence indemnity
prohibited by Public
form clause Policy/Statute?

No Yes
Yes
Identify Yes No
contract risk:
Comparative-
Indemnity Yes
form clause
Active No

Type of Comparative
No clause* negligence by contribution No
indemnitee?
(quantitative)
Passive Indemnitee’s
financial
responsibility?

* Or clause rendered Common law

“general” or ambiguous, indemnity Yes
thus voiding it (qualitative)

Figure 3. “Indemnity” Legal Issues and Considerations Flow Chart

In instances where an indemnity clause is not present in the construction contract (or the clause
has been rendered void), the party seeking indemnity must show that they were only a passive
participant in bringing about the loss. Based on the results from the active and passive conduct
comparison, indemnity can be granted according to comparative contributory negligence (shared
financial responsibility) or common law indemnity (all-or-nothing). Common law indemnity simply
shifts the entire loss from one party to the other depending on active and passive conduct. Many
states, however, have moved to “comparative negligence” as a method of avoiding the all-or-nothing
aspects of common law indemnity. Comparative negligence determines what portion of the loss or
damages can be allocated to each party individually. In instances where each party has violated
the same duty (both active participants), indemnity is usually denied. The logic of these governing
factors, however, is ignored in situations where an indemnity clause is present in the construction
contract.

35
 Where a clause is present, indemnification rights depend on the type of clause found in the
contract. Provided the clause is broad or intermediate, the written indemnification of the indemnitee’s
sole and partial negligence can only be upheld in states where this type of indemnification is not
against public policy or statute and the indemnification intentions are “expressly” or “clearly and
unequivocally” stated in the clause. Public policy restrictions stem from the belief that if the indemnitee
is indemnified in the case of its own sole negligence, it will become careless in its responsibilities.
When expressed indemnification is not present in the clause and the state does not prohibit complete
indemnification, an indemnitee can still receive indemnity where it is proven that the contractual
intentions of both parties were as such; this is often difficult to prove, however.

4. Ambiguous Acceptance Criteria

If a contract contains ambiguous acceptance criteria (especially troubling in design-build and
process-oriented contracts) costs can increase quickly. All parties will benefit when the acceptance
criteria avoid qualitative statements and contain clearly measurable, objective, and quantitative
criteria. Frequently, acceptance criteria may include phrases that specify that the work be completed
so that it is “fit for purpose” or “to the owner’s satisfaction.” This can lead to a situation where the
contractor may feel that it has achieved the acceptance criteria, but the owner views the contractor’s
performance as falling well short of acceptance. Some contractors feel that ambiguously defined
acceptance criteria can also lead to the owner using the punchlist as a “catch-all” to modify or fine-
tune the design to make it “acceptable.”

When ambiguous acceptance criteria do exist, delays will almost certainly result as the contractor
works towards criteria that differ from the owner’s actual needs. Both parties will likely absorb
direct and indirect costs that stem from the delays. In the end, the owner may be forced to accept a
finished product that does not meet its needs and may have to absorb additional costs for rework.
Ambiguous acceptance criteria closely relates to the scope definition of a project. If the scope is not
clearly defined, even well-drafted acceptance criteria may become unreasonable under the extrinsic
circumstances of the project.

Contracting parties may often disagree as to whether or not a certain clause provides clear
and unequivocal terms. Furthermore, parties may not possess an adequate understanding of how
U.S. courts commonly approach rulings when confronted with ambiguous acceptance criteria. This
section will discuss how courts determine whether or not a criteria is ambiguous or not, and which
party will be held responsible for the resultant increase in costs. After reading this section of the
publication, contracting parties should be able to more adequately draft acceptance criteria that
are not ambiguous. At the very least, contracting parties will have more knowledge of how courts
commonly deal with the risk of ambiguous provisions. Accordingly, parties may be able to make
better decisions regarding the pursuit of legal action if they have a good idea of how ambiguous
acceptance criteria will be interpreted by the court.

Ambiguous acceptance criteria commonly occurs within the contract clauses that address
“mechanical completion,” “substantial completion,” “contract or final completion,” and “final
acceptance.” Within these types of clauses testing, commissioning, and permitting requirements
will be established along with more generic requirements such as, “The Work is structurally,
mechanically, electrically and functionally constructed in accordance with the requirements of the
Contract Documents.” Ambiguities can surface within any sentence in a contract, but ambiguities
regarding acceptance of the project have the potential to fundamentally alter the entire objective
of the contract as perceived by the contractor versus as perceived by the owner. This conflict in
interpretation has the potential to severely delay a project since major completion milestones always
fall on the critical path of a project schedule.

The following discussion of legal principles pertains to any and all ambiguities that may be found
in a contract, not just in the acceptance criteria. A court will view all ambiguities in a similar manner,
so there is no specialized difference in interpreting ambiguous acceptance criteria.

Figure 4 displays the ambiguous acceptance criteria legal issues and considerations flow chart
that generically lays out the allocation of risk when an alleged ambiguity is present.

Prior to bidding,
clarification is sought Drafter assumes
from the drafter of the costs resulting
ambiguity? from ambiguity?

Yes Yes
Yes
No No
Ambiguity is patent
Yes to a reasonable
individual? No Yes
Identify
contract risk: No Interpretation* relied upon
Criteria has conflicts with extrinsic
more than one evidence speaking to the
Ambiguous reasonable
Yes
intention of the parties?
Acceptance interpretation*
Interpretation* relied upon
Criteria and/or does
not have a plain is consistent with the whole Yes No
meaning? Yes portion of the contract
containing the ambiguity?
Established trade
practices or No
No customs evidence a
competing, alternate
interpretation*? * Relied upon in preparing bid
(NOT an “after-the-fact” interpretation)
No No

Figure 4. “Ambiguous Acceptance Criteria” Legal Issues and Considerations Flow Chart

If acceptance criteria do not have more than one interpretation or are seemingly plain in their
meaning, the only mode of recovery against the drafter will be when the party performing the contract
relies on an interpretation of the criteria that corresponds with established trade practices or customs.
Also, the interpretation must have been relied on when the contract was entered into.

If the contract terms are ambiguous, the court will determine whether or not the ambiguity is
patent or latent. If the ambiguity is patent, the bidder will be bound to inquire upon the drafter for
clarification. If the bidder does so, it will usually be able to recover its costs from the drafter if the
clarified interpretation later results in project difficulties.

37
 If the ambiguity is latent, the bidder’s interpretation will be construed over the drafter’s
interpretation according to the Contra Proferentem rule, so long as the bidder’s interpretation does
not conflict with extrinsic evidence or other portions of the contract when read as a whole (Pari
Materiae).

5. Force Majeure
In any construction project, the fear of the unknown is an ever-present reality. At the time a
construction contract is entered into it is impossible to predict every single event that could occur
and have a devastating impact on the project. These unknown events are commonly referred to
as “force majeure” events. According to Webster’s dictionary “force majeure” can be defined as
a “superior or irresistible force” or “an event or effect that cannot be reasonably anticipated or
controlled.” The definition goes on to compare it to an “act of God,” which is further defined as: “an
extraordinary interruption by a natural cause (as a flood or earthquake) of the usual course of events
that experience, prescience, or care cannot reasonably foresee or prevent.”

Force majeure (“acts of God”) clauses, particularly considering the catastrophic hurricane
damage to Louisiana and Mississippi in late 2005, need to eliminate the risk for potential disputes.
Force majeure invoking events should be clearly and unambiguously defined along with the allowable
compensation measures. Oftentimes contracting parties will rely on insurance companies to provide
protection from force majeure events. However, the potential for insurance companies to go insolvent
in the case of a force majeure event makes it even more important that the contract documents
clearly address the risk factors surrounding force majeure events.

In construction law, the contractor is responsible for any damage or loss that occurs to
a structure during its construction (Clough, 1994). However, if a force majeure event causes the
damage, the contractor can find relief via a force majeure clause. If there is no force majeure clause
several common law principles may provide relief when a force majeure event occurs: impossibility,
impracticability, and frustration.

Impossibility is the common law rule that a court can use to relieve contracting parties if it can be
concluded that performance has become physically impossible. If a contracting party contributes to
the impossibility through its own actions, excuse from the contract will not be granted. Impossibility
doctrine is based on the assumption that both parties will be able to perform as originally contemplated
at the inception of the contract. Impossibility doctrine (along with impracticability and frustration) is
a default and does not apply when contracting parties have agreed to a different allocation of risks
through direct contract language.

The doctrine of impossibility includes physical impossibility as just described as well as extreme
impracticability of performance. Impossibility and impracticability doctrines are closely related
and often indistinguishable in application by courts. The application of impracticability allows for a
broader scope of circumstances that may allow a grant of discharge from a contract, since absolute
physical impossibility will not be a prerequisite for excuse. Instead, continued performance amounts
to an impractical venture instead of a literally impossible situation.

38
 Frustration or “frustration of purpose” is the third and final common law principle that may allow
discharge from a contract in the absence of a contractual provision addressing force majeure. In the
absence of a force majeure clause, if an event occurs that causes performance of an obligation not to
become impossible or extraordinarily difficult, but to substantially frustrate the principle purpose for
which one of the parties entered into the contract, the doctrine of frustration may apply.

The doctrines of impossibility, impracticability, and frustration are similar concepts and thus
are often confused in their applications (“…some cases speak of a contract as “frustrated” when
performance has become impossible or impracticable” 7200 Scottsdale Rd. Gen. Partners v. Kuhn
Farm Mach., 909 P.2d 408 (Ariz. Ct. App.1995)). Although inferred by their definitions, in order for the
application of the doctrines of impossibility, impracticability, or frustration, the invoking event must
have been unforeseeable at the time the contract was entered upon.

Apart from a direct contract clause addressing force majeure events, an injured party’s only
hope is that the court will provide relief through one of the common law doctrines just discussed.
Because it is impossible to predict every event that could occur and have a devastating impact on
a construction project, Force Majeure clauses are usually incorporated in some form into modern
construction contracts.

Figures 5 and 6 illustrate the “force majeure” legal issues and considerations flow chart. For
the purposes of the flow charts it was assumed that a typical force majeure clause was being
examined, i.e., a clause constructed to give relief to the contractor in the case of a force majeure
event. Contracting parties should investigate their own legal systems to specifically determine what
portions of the flow chart do and do not apply. For example, Indiana law does not allow a buyer to
claim impracticability and does not recognize the defense of frustration (N. Ind. Pub. Serv. Co. v.
Carbon County Coal Co., 799 F.2d 265 (7th Cir. 1986)). Furthermore, Texas courts have abandoned
the application of the doctrine of impossibility (Perlman v. Pioneer Ltd. P’rship, 918 F.2d 1244 (5th Cir.
1990)).

Contractor
relieved?**

Yes See Figure 6…

Did the contractor
substantially
Yes comply with notice
Identify
provisions?
contract risk:
Contract
contains a No
Force “force
Majeure majeure”
Yes Yes
clause?*
Impossibility,
impracticability, or
No frustration of purpose
apply?

No No

* Even if a “force majeure” clause does not specifically exist, other clauses may allow or disallow recovery
- Examples: “No Damages for Delay” clauses, “Labor Strike” clauses…
** Relief limited to the extent that the contractor could not reasonably mitigate against

Figure 5. “Force Majeure” Legal Issues and Considerations Flow Chart

39
 The flow chart generically lays out the ability of a contractor to find relief in the case of a force
majeure-type event. Again, if the contract does not contain a specific clause addressing force
majeure, relief will be governed by the doctrines of impossibility, impracticability, and frustration. If
there is a clause, the contractor must comply with the notice provisions or its sole recourse will again
be to seek recovery under one of the three doctrines just mentioned.

Contractor
relieved?**

Yes Yes*

No
Clause
contains
No “catch-all” No No
…Cont. from Clause is phrase?
Event is of the
Figure 5 ambiguous? Event same type as
Yes the listed
is in
Yes the event(s)?
list?
Clause
Yes
contains
list of Yes Yes
No force
majeure
events?
Relief available if court
No finds the event to be
covered by force
majeure“catch-all” phrase
* If contractor didn’t draft the clause, and it is not patently ambiguous
** Relief limited to the extent that the contractor could not reasonably mitigate against

Figure 6. “Force Majeure” Legal Issues and Considerations Flow Chart (Continued)

If a contractor complies with notice provisions but the clause is ambiguous, the contractor will
find relief unless it drafted the clause or the ambiguity was patent. If the clause is not ambiguous
there are three different situations of contract language that will be present: a clause containing a
“catch-all” phrase, a clause containing a list of specific events, or a clause that contains a “catch-all”
phrase and a list of specific events. If the clause consists solely of a “catch-all,” boilerplate provision,
the court will have great liberty in deciding whether or not the event in question triggers relief. If
the clause solely contains a list of specific events, the clause will provide relief only if the event in
question is contained within the list. If the clause contains a “catch-all” phrase along with a list of
specific events, the event in question will trigger relief if the event is construed to be generally of the
same nature as the events listed per the legal rule of Ejusdem Generis.

It should be noted that if economic conditions are not specifically listed, they will not be construed
by a court to constitute a force majeure event. Also, contracting parties have a duty to mitigate their
losses whenever possible. If this is not done, relief will be adjusted to reflect the failure to mitigate.

40
6. Schedule Acceleration
Oftentimes a contractor may have to accelerate its work progress during a construction project.
This acceleration is typically accomplished by working overtime, adding more workers to the project
(overmanning), or working multiple shifts (shift-work). Mandated acceleration, recovery acceleration,
and constructive acceleration are the three main types of acceleration possible.

Mandated (or direct) acceleration occurs when the owner directs the contract to accelerate the
schedule merely because it wants an earlier completion (no excusable delays or substantial increases
in scope have occurred).

Recovery acceleration occurs when the contractor falls behind schedule due to its own actions or
inactions that have resulted in schedule delays. The contractor will need to accelerate the schedule in
order to finish by the original completion date. Although rare, the contractor may choose to accelerate
the schedule voluntarily in order to achieve an earlier completion.

Constructive acceleration occurs when the contractor files a justified time extension, the owner
denies it, the contractor is held responsible for the original completion date, and thus the contractor
is forced to accelerate its work. A justified time extension may result when the contractor experiences
an excusable delay, or a large increase in scope requires more time for completion.

Acceleration of work creates labor inefficiencies such as fatigue, low morale, loss of job rhythm,
and pacing, which tend to lower labor productivity and thereby increase construction costs. When a
contractor accelerates work because it has fallen behind schedule due to its own actions or inactions,
the contractor must absorb the additional costs associated with lost labor productivity.

An owner needs to recognize that when a contractor makes a request for an extension of time,
the owner’s failure to act in a timely manner may be interpreted by the court to constitute as a
justification for the contractor to constructively accelerate its work. Therefore, as soon as the owner’s
agent has decided whether or not the delay is excusable it should notify the contractor, even if the
exact amount of time extension is not known yet. This way the contractor will not accelerate the
schedule prematurely. When possible, the owner should always extend the project completion date
since a simple delay claim is usually much cheaper than a constructive acceleration claim (Interface,
2005). However, if the schedule is so sensitive that an extension in time is simply not possible, the
owner should seek to come to a contractual agreement concerning compensation for acceleration
prior to project commencement.

In summary, if the owner mandates acceleration for its own purposes, it will almost always pay
the additional contractor costs associated with that action. However, if acceleration occurs from no
fault of the contractor, it will be able to collect its extra costs only if it meets the specific constructive
acceleration stipulations outlined herein. Figure 7 (next page) illustrates the schedule acceleration
legal issues and considerations flow chart. Contracting parties should check to see if their local legal
jurisdictions recognize the concept of constructive acceleration.

If the owner mandates acceleration merely to achieve an earlier completion for its own
convenience, the contractor will be able to recover its acceleration costs unless the contract clearly
and unequivocally waives this right. Obviously, if the delay is not excusable, the contractor will not

41
 Contractor acceleration
costs recoverable?

Yes (unless the contract gave the owner

Identify Yes the right to mandate with no additional
contract risk: compensation)
Owner
Schedule mandates No No
Acceleration acceleration?
Contractor Yes Yes
experiences
No an excusable
No
Contractor
delay? Contractor attempts to
submits timely accelerate
Yes Yes the work and
Yes and sufficient
request for time increases its
42

If necessary, costs?
extension? Owner
contractor
approves
notifies the No No
Yes request in a
Yes owner that it
reasonable
will accelerate
timeframe?
Owner at the owner’s
requires expense?
No schedule
adherence?* No
No
* This can come in the form of liquidated
damages, direct command, or coercion

Figure 7. “Schedule Acceleration” Legal Issues and Considerations Flow Chart

recover its costs for acceleration efforts stemming from the delay. If the delay is excusable, the
contractor must submit a timely and sufficient request for an extension of time. Failure to do so
will result in a forfeiture of acceleration costs. If the contractor submits an appropriate request, the
owner must approve the request in a reasonable timeframe. If the owner approves the extension in a
timely fashion, the contractor will not receive any compensation if it accelerates the schedule since
it has ultimately been awarded extra time for the delay. If the owner fails to grant a time extension
in a timely fashion, however, the court will look to see if the owner required the contractor to adhere
to the original completion date. If the owner did require schedule adherence through the threat of
liquidated damages, a direct command, or coercion, the court will then look to see if the contractor
subsequently notified the owner that it was going to accelerate under protest at the owner’s expense.
In some circumstances this duty of notification is not required: if (1) the acceleration has been directed
by the owner; (2) the owner has communicated that no time extensions will be granted; or, (3) the
owner has waived the need for notice (Wray, 2000). If the contractor meets notification requirements
(if necessary) and it actually attempts to accelerate the work, it must lastly prove that the acceleration
effort resulted in increase costs (even if the acceleration effort is not successful). If the contractor
can meet these final requirements, in most circumstances it will be able to recover its acceleration
costs.

7. Cumulative Impact of Change Orders

Once a construction project has begun, the cost of making a design change tends to exponentially
increase as the project progresses. Because of the direct and indirect costs associated with change
orders they are often at the center of legal disputes. As change orders on a project multiply, their
disruptive impact to the project as a whole begins to exceed the sum of their individual impacts to
the project when analyzed individually. When the number of change orders becomes unreasonably
high, the cumulative impact of the change orders creates an excessive disturbance to the project in
terms of performance time and productivity. These changes come in primarily three forms of change:
directed, constructive, and cardinal.

A directed or actual change occurs when the owner directs a change and all parties agree that the
change is actually a change; consequently the change is then quantified for its impacts on time and
cost. A constructive change occurs when the contractor is ordered to perform work that it views as
an increase in its scope, whereas the owner feels that the work is included in the contractor’s original
scope. In order to collect compensation for the disputed work, the contractor must indicate that it
will perform the work, but will submit a claim at a later date. At the later date, the contractor must be
able to prove that a change order should have been issued by showing that the work was outside the
scope of the contract, the owner ordered the work to be performed, the contractor performed the
work in protest, and the contractor expended additional time and/or money to perform the work.

When a cardinal change occurs, it qualifies as a breach of contract by the owner. A cardinal
change can occur when the owner mandates (not proposes) that a contractor perform a change that
is outside the scope of the contract or when the owner directs multiple or drastic change orders that
cause the contracted work to become materially different from what was expected when the parties
entered into the contract.

43
 In order to construct a successful cumulative impact claim, the contractor has the burden of proof
to establish liability, causation, and resultant injury. Liability can be established by merely showing that
a substantial amount of owner changes or disruptions occurred. Proof of both liability and causation
are satisfied within a cardinal change. However, simply showing that a large number of changes and
a cost overrun occurred is not enough to establish causation; rather, the substantial change must
be linked to the cost overrun. Therefore, contractors should make sure that they keep scrupulous
records in order to provide proof of causation via individual impacts of changes or changed working
conditions that led to an overall decrease in labor productivity.

Commonly, the resultant injury is calculated by using the total cost method, the modified total
cost method, or the measured mile approach. In any method, it is imperative that the claimant obtain
an expert witness who will provide an exhaustive analysis and defense of the project documents
associated with the cumulative impact.

Due to the poorly defined nature of cumulative impact, it is not clear how a jurisdiction will rule
concerning compensability. If an impact of a change order on the unchanged work was foreseeable, it
should have been included in the pricing of the change order and therefore is not recoverable. However,
the increased effects of cumulative change orders are often not considered or foreseeable.

Assuming the change orders did not include contingency options that were collected by the
contractor and the contractor did not knowingly waive its right to assert cumulative impact claims, it
will still possess the right to a damages claim due to cumulative change orders. In the past, courts
required that a cardinal change be established in order to allow recovery of cumulative impacts from
change orders; however, in recent years this has shifted to requiring proof of a constructive change
instead.

Figures 8 and 9 display the cumulative impact of change orders legal issues and considerations
flow chart. Each individual industry participant should investigate its own jurisdictional history
concerning cumulative impact in order to more fully comprehend how it might adequately prepare or
avoid a cumulative impact claim.

The flow chart establishes a generic guide for determining when a cumulative impact claim will
be successful or not. First, a large number of owner-caused changes must be issued. Secondly,
the contractor must be able to either: (1) separate owner and contractor caused labor inefficiencies
or (2) prove that the owner is the sole source of all inefficiencies (no other source is possible). If
the contractor is able to achieve one of these requirements it may be able to pursue a cumulative
impact claim by citing a constructive change, cardinal change, or abandonment of the contract.
If the contractor can establish one of these three recovery doctrines it must then prove liability,
causation, and resultant injury from the cumulative impact of change orders (although some courts
and boards may only require proof of resultant injury after one of the three recovery doctrines has
been established). Typically, the proof of resultant injury will require an expert’s assistance and
testimony.
 Contractor may collect
cumulative impact?

Identify
contract risk: No No
A significantly
Cumulative large number No
Impact of of owner No
Change changes Contractor is able No
experienced? Contractor’s
Orders to separate owner
productivity is
and contractor Impact stems No See Figure 9…
impacted? directly from
Yes caused productivity No
losses or prove that synergy of # and The cumulative
the owner is the Yes scope of changes? impact was
Cardinal previously
sole source?
change, foreseeable?
Yes
45

abandonment
Yes of contract, or
constructive
Yes No
change
established? No

Yes Liability, causation,

and resultant
injury* proven

Yes Yes
* Almost always requires an expert

Figure 8. “Cumulative Impact of Change Orders” Legal Issues and Considerations Flow Chart
 Contractor may collect
cumulative impact?

No No

No No
Release voided by lack of
Change consideration, performance, or
…Cont. from order form No authority; unilateral or mutual
contains mistake, misrepresentation,
Figure 8 duress, or coercion?
release? Release is ambiguous or boilerplate
regarding umulative impact (AND)
parties never discussed whether Yes Yes
No or not cumulative impact was
covered by the release (OR) parties
Contractor discussed but never reached
reserved its “meeting of the minds?”
Yes rights to assert
cumulative Yes Yes
impact?

Yes

Figure 9. “Cumulative Impact of Change Orders” Legal Issues and Considerations Flow Chart
(Continued)

If the contractor is unable to establish one of these three doctrines of recovery it may be able to
continue through a more generic recovery method. First, it must prove that its productivity suffered
from the multiple change orders, the impact stemmed from the number and scope of the changes,
and the impact was previously unforeseeable. Once these elements have been established, a court
or board will typically examine the contract documents to see if there was a release. If a release
was present, the contractor can continue with its claim if it clearly reserved its right to assert a
cumulative impact claim. If the contract did not reserve its right, it may still be able to recover its
losses if the court establishes that the release was ambiguous or general (boilerplate) and the parties
either never discussed the applicability of the release to cumulative impact or they discussed the
concept but never reached a “meeting of the minds.” If neither of these situations applies the last
opportunity of recovery will hinge on whether or not the release is voided by lack of consideration,
lack of performance, lack of authority, unilateral or mutual mistake, misrepresentation, duress, or
coercion.

8. Differing Site Conditions

The risk of differing site conditions is broken into two distinct types (where the absence of such
conditions was an assumption upon which both parties entered into the contract): Type I – conditions
that materially differ from those indicated or represented in the contract documents, and Type II
– conditions that materially differ from those which can ordinarily be reasonably expected by the
contracting parties for the type of work being performed.

Since differing site conditions can increase costs drastically by causing severe delay and
mitigation costs, differing site conditions clauses are commonly used to allocate the risk. These
clauses typically provide a definition for a changed condition and specify the procedures and
cost reimbursement policies for both the owner and contractor when differing site conditions are
encountered.

46
 The goal of many clauses is to shift the responsibility to the owner in an attempt to obtain a fair and
equitable bid price from the contractor. Yet general clauses often attempt to require the contractor to
assume responsibility for verifying the existing site conditions to assure that they do not differ from
what is specified in the design plans and specifications. This can become a heated source of debate.
The general clause puts this problem on the contractor, yet the contractor is essentially required
to use the information supplied by the owner in order to remove the contingency cost for unknown
site conditions from its bid price and remain competitive with other contractors. Consequently, the
assignment of responsibility hinges on the reasonableness and results of any existing site conditions
investigation.

Differing site conditions clauses are typically drafted with the intention of allowing a contractor
recovery if it encounters conditions that materially differ from those indicated in the contract
documents or conditions that materially differ from those that could reasonably be expected.
However, a contractor cannot expect to be able to rely on a differing site conditions clause to save
it from increased costs in any and all differing site condition circumstances. On the contrary, there
are several elements that may prevent a contractor from recovery notwithstanding the presence of a
differing site conditions clause: site investigation requirements, exculpatory contractual statements,
notice requirements, and proof of the certainty of resultant damages.

Generally, site investigation contractual requirements will not prevent a contractor from recovery
unless an encountered condition should have reasonably been discovered by a site investigation
conducted by a reasonably prudent contractor. Some investigation clauses also require the
contractor to review pertinent documents concerning site conditions made available by the owner.
If the contractor fails to review the documents, it may not be able to recover its losses if the site
condition causing the loss would have been exposed if the contractor would have reviewed the
required information.

If a contractor has examined and discovered all site information made reasonably available to it
and none of it conflicts with the owner-provided information within the contract documents, many
courts will rule that the contractor has reason to rely on the owner-provided information despite any
exculpatory language that appears in the contract in an attempt to disclaim the accuracy of owner-
provided information.

A differing site conditions contractual provision will typically state that a contractor has a certain
time limit in which in must notify the owner or its agents in writing of any conditions encountered
that may qualify as a “differing site condition.” If the contractor does not adhere to these notice
requirements, it may lose its ability to recover damages under a differing site conditions clause.

Just like any other claim, regardless of if there is a differing site conditions clause in the contract
or not, a claimant must be able to prove its injuries with a reasonable amount of certainty. If it is not
able to reasonably do so, it will not be able to recover said damages.

A contractor does have several means of compensation for costs relating to changed conditions
as a matter of common law when there is no contract clause present that addresses differing site
conditions, or there is a clause but it is rendered void through the contractor’s failure to adhere
to its requirements (e.g., non-compliance with notice provisions). Most commonly, the contractor

47
must be able to prove one of the following avenues of recovery: duty to disclose, mutual mistake,
misrepresentation, breach of implied warranty, or impossibility.

If the owner possesses site information that would have assisted the contractor in identifying
potentially differing conditions, the owner may be held liable for differing site conditions thereafter
discovered per the owner’s common law duty to disclose.

Mutual mistake can be claimed by a contractor to recover its losses associated with a differing
site condition if it can show that a condition existed of which both the contractor and owner were
equally unaware.

The concepts of duty to disclose and misrepresentation are closely related. Generally speaking,
the difference is that recovery under the duty to disclose concept can be sought when the owner
did not reveal information that would have allowed the contractor to account for the differing site
conditions, while recovery under the concept of misrepresentation can be claimed when the owner
fraudulently or innocently (unintentionally/negligently) misleads the contractor (orally or through
contract documents).

The Spearin doctrine (see “design responsibility” risk discussion) establishes that the owner
impliedly warrants to the contractor that the plans and specification will be adequate to achieve an
acceptable product. Pertaining to differing site conditions, if the plans and specifications indicate
what type of existing conditions may be encountered, the contractor may be able to make a claim for
breach of contract when conditions are encountered that materially differ from those indicated.

The doctrine of impossibility includes physical impossibility as well as extreme impracticability of

performance. If discovery of differing site conditions render performance impossible or impractical,
the contractor may be excused from the contract.

Differing site conditions clauses can be an effective method for achieving an equitable allocation
of this risk in a construction contract. By an owner accepting responsibility for such a risk, the
contractor will not have to price this risk, which may or may not occur, into the bid price. Regardless
of the allocation, if a differing site condition arises, the contractor should give notice to the owner and
detail its effects on schedule and performance.

The risk responsibility for existing and differing site conditions highly depends on the contract
language, or lack thereof, regarding this matter. Figures 10 and 11 contain the differing site conditions
legal issues and considerations flowchart. This flowchart represents the general persuasions of the
U.S. judicial system. However, it would be impossible to create a flow chart that would accurately
capture every manner in which a court may rule. The specific circumstances of each case along with
the controlling legal jurisdiction presiding over each case will carry the most weight in predicting how
differing site conditions issues will be resolved by a court.

The flow chart shows that first a contractor and owner must establish if site information
represented in the contract documents can be relied upon by the contractor. Investigations into
the local legal jurisdictions should be made in an attempt to determine if exculpatory provisions will
be strictly construed. If they are not construed as such, generally contractors will be able to rely
on the site information contained within the four corners of the contract. However, if the contractor

48
 Which party
No assumes the risk?

Yes Contractor

Did the contractor

Did
discover (or Yes Owner
encountered
“reasonably” Yes
conditions Did the
should have)**
Yes differ from Did the contractor prove
and rely on
those conditions in contractor increased costs
indicated? direct conflict with substantially with reasonable
Yes comply with certainty?
Was there
Yes all of the owner-
the notice
furnished
Identify owner- requirements? No
information?
contract risk: furnished site Was the Was there a
information contractor differing site No
No
49

Differing Site that the Yes responsible conditions

Conditions contractor for further site (Type I & II) No Contractor
could review investigation? clause?
and Duty to disclose,
reasonably mutual mistake,
rely upon*? No misrepresentation,
No breach of implied
warranty, or No
* Contractors cannot “reasonably rely” upon owner-provided impossibility
No See Figure 11… information if a court strictly construes an exculpatory apply? Did the
provision, or if there is no such information provided contractor prove
** In the case of fraudulent misrepresentation, the contractor Yes increased costs
will only be liable if it “did” in fact discover conditions with reasonable
that contradicted ALL of the fraudulent owner-provided certainty?
information. In all other cases, the contractor will assume
the risk if it did or should have discovered and relied on Yes Owner
conflicting site information

Figure 10. “Differing Site Conditions” Legal Issues and Considerations Flow Chart
 Which party
assumes the risk?

No Contractor

Type II Recovery:
Did the Yes Owner
encountered
conditions differ Did the contractor prove
materially from Yes increased costs with
those reasonably reasonable certainty?
Yes anticipated***? Did the contractor
substantially comply No
with the notice
Was there a Yes requirements?
…Cont. from differing site No Contractor
50

conditions
Figure 10 (Type I & II) No Duty to disclose,
clause? mutual mistake, No
or impossibility
No apply? Did the
contractor prove
Yes increased costs
*** If the contractor was required to investigate the with reasonable
site conditions it will be held to the expectation that certainty?
it should have “reasonably anticipated” conditions
that it did or should have discovered by conducting Yes Owner
a “reasonable” investigation

Figure 11. “Differing Site Conditions” Legal Issues and Considerations Flow Chart (Continued)
is required to investigate the site it will be held responsible if it discovers (or reasonably should
have discovered) site conditions that contradict or clarify what the contract documents indicate. If
a portion of misrepresented site conditions are not clarified after a reasonable investigation by the
contractor, it should still be able to recover for damages resulting from the undiscovered portion of
the misleading owner-provided information.

In the case of fraudulent misrepresentations of site conditions, the contractor’s site investigation
will shift the risk back to the contractor only if it did in fact discover conditions that contradicted
or clarified ALL of the fraudulent information. If the contractor discovers site conditions that only
render some of the owner-provided fraudulent information useless, it will still be able to recover for
damages stemming from the portion of the fraudulent misrepresentations that were not rendered
void by the contractor’s reasonably prudent investigations. If the contractor should have discovered
conditions that would have contradicted or clarified fraudulent information but did not discover
such conditions, the law will generally still allow the contractor to pursue a claim stemming from the
fraudulent misrepresentations.

If a contractor’s required site investigation, or lack thereof, does not shift the risk to the contractor,
it will be able to pursue equitable adjustment under a differing site conditions clause. Common law
mechanisms such as duty to disclose, mutual mistake, misrepresentation, breach of implied warranty,
or impossibility can be used by the contractor to seek recovery if: (1) a differing site conditions
clause does not exist, or (2) a differing site conditions clause is voided due to non-compliance with
notice requirements. Regardless of the mode of recovery sought (contractual or non-contractual), a
contractor will still have to prove its resultant injuries with a reasonable amount of certainty.

If the contractor cannot reasonably rely upon site conditions contained within the contract
(because of a strict enforcement of an exculpatory provision), or no such representations exist, it may
still be able to recover its increased costs stemming from differing site conditions. First, if there is a
differing site conditions clause, the contractor will be able to recover if the encountered conditions
could not have been discovered through a reasonably prudent contractor site investigation, or no
such investigation is contractually required. Furthermore, the contractor will also have to substantially
comply with the notice requirements to be able to seek equitable adjustment under the clause. With a
typical “type 1/type 2” clause, recovery will now come under a type 2 condition (conditions materially
different from what can normally be expected), since a type 1 condition (conditions differ from those
indicated in the contract) can not exist due to the strict upholding of an exculpatory provision, or the
fact that no owner-provided site information exists in the contract documents.

If there is no clause or the clause is rendered useless due to non-compliance with notice
provisions, the contractor may still be able to recover under the common law mechanisms of duty to
disclose, mutual mistake, or impossibility. Misrepresentation and breach of implied warranty do not
apply because at this point in the flow chart it has been established that there is no owner-provided
information in the contract documents that the contractor could reasonably rely on in the first place,
or there is no owner-provided information in the contract at all. Again, if the contractor is going to be
able to successfully recover its damages, it must be able to prove them with reasonably certainty.

51
9. Design Responsibility
The ultimate responsibility for defective plans and specifications can often be a source of ambiguity
in the construction industry. Oftentimes the owner will attempt to place the risk associated with
the plans and specifications onto the contractor through direct contractual language. Complicating
matters, a contractor may also attempt to include clauses within its subcontracts that attempt to
further shift the design risk down to the subcontractors. For the sake of simplicity, the following
discussions on design responsibility will focus on the owner–contractor relationship.

When an owner inserts a clause attempting to shift the design risk, the contractor will typically
be required to bring any and all errors and omissions in the design to the attention of the owner or
architect. In many cases, the contractor will demand compensation for the changes or delays caused
by undiscovered design inaccuracies, while the owner will claim that the contractor is responsible
for the associated costs since it was contractual responsible for reviewing the design plans and
specifications and discovering all inadequacies. These types of disputes often result in a construction
claim. Depending on the defective nature of the design along with the contractual language present,
the courts may or may not reject the notion that the responsibility of design lies with the contractor.
The following pages will provide insight as to the terms and conditions for which both an owner and
contractor can be held responsible for the risks involved in design responsibility.

In every traditional construction contract, the owner impliedly warrants that the plans and
specifications are accurate and sufficient enough to build the project. This implied warranty for the
plans and specifications on a construction project has been upheld as a result of the Supreme Court
case of United States v. Spearin, 248 U.S. 132 (1918).

Although the Spearin doctrine is considered “good law” on face value, there have been instances
where courts have not relied on a strict application of the doctrine. The following sections will
discuss several elements that may prevent a contractor from recovery under the Spearin doctrine.
These elements are the contractor’s duty to review the design documents, the presence of an
express warranty in the contract, and the existence of performance specifications instead of design
specifications.

First, the implied warranty of specification does not relieve the contractor from its duty to conduct
a reasonably prudent review of the plans and specifications and bring any noticeable errors and
omissions to the attention of the owner. If the contractor fails to notify the owner of a design error or
omission that the court deems obvious, the implied warranty of the design will not be upheld and the
contractor will be held responsible.

Secondly, oftentimes an owner may claim that a contractor cannot recover losses under the
Spearin doctrine if the contract documents contained either an express disclaimer of the owner’s
responsibility for the information represented in the plans and specifications, or an express warranty
that the contractor’s work would be free from faults and defects and that any defects in the work
would be reworked at the contractor’s expense. It is widely known that courts will typically not enforce
boilerplate or broad-form statements within a contract. However, clear and unequivocal language that
adopts express language may be enforced by some courts to shift the responsibility of the design.

52
 Lastly, design specifications will specify the particular components, dimensions, and types of
materials to be used by the contractor, whereas performance specifications will simply specify the
qualities of the end product then leave the contractor to determine the means it will use to achieve the
desired product. Some contracts may contain a mixture of design and performance specifications.
In these cases, the Spearin doctrine will apply, but only to the portion of the specifications that are
design specifications.

The situations discussed herein outline a number of possible scenarios that may arise when
dealing with design responsibility in construction contracts. The Spearin doctrine plays a big role
in determining which entity will ultimately be held responsible for the design. It should be noted
that in a traditional design-bid-build contracting method, the owner’s implied warranty of the plans
and specifications will remain even if the design is completed by a consortium of A/Es which are
separately or conjointly contracted with the owner. Similarly, in a design-build contracting method,
the design-build contractor will impliedly warrant the overall sufficiency of its design according to the
Spearin doctrine regardless of how many specialty A/Es and/or consultants retained by the design-
build contractor assisted in the design process.

Figure 12 contains the design responsibility legal issues and considerations flow chart.

Owner retains design

responsibility through
implied warranty?

No Yes
Contract contains
an express
Yes disclaimer or
warranty?
Contractor
reasonably Yes Varies
reviewed*
Identify Yes and relied upon
contract risk:
the contract
Design documents?
Design (prescriptive)
Responsibility specifications
No
(not performance)?

No No

* Reasonable review = contractor was not aware of design errors or

could not have reasonably discovered them. Also, if patent design
ambiguities existed, contractor must have sought clarification.

Figure 12. “Design Responsibility” Legal Issues and Considerations Flow Chart

The flow chart shows that if the design in question does not qualify as a design specification, then
the owner’s implied warranty of the design will not apply. However, when the design does qualify as a
design specification, the contractor must have reasonably reviewed all of the contract documents in
order to be able to claim reasonable reliance. A reasonable review will have occurred if the contractor
was not able to discover any design errors or could not have reasonably discovered them. Also, if
patent design ambiguities existed, the contractor must have sought clarification from the owner or
its agents (i.e., A/E). If a reasonable review and reliance can be established, it can be confirmed that
information represented within the contract documents may have misled the contractor. If the contract

53
contains express disclaimers or express warranties, the end result will vary. Some courts may strictly
construe such provisions, while others will narrowly construe them. Each case’s unique characteristics
and circumstances will determine whether or not an express provision will limit the applicability of the
Spearin doctrine. It should be noted that not all legal jurisdictions specifically recognize the Spearin
doctrine, but most recognize that the owner does have an implied duty nonetheless to provide plans
and specifications that are sufficient to produce a functional constructed product.

10. Standard of Care

Standards of care in the construction industry are important concepts that help to ensure
the quality and cost-effectiveness of the constructed product, and most importantly the safety of
all participants during and after the construction process. If an individual does not conduct itself
according to the standard of care expected, it may be liable due to its negligence. If the negligent
party is a licensed professional (e.g., engineer) it will be held liable due to its “professional” negligence.
If the negligent party is not a licensed professional (e.g., contractor) it will be held liable due to its
“ordinary” negligence. Professional and ordinary negligence are similar legal concepts, and are both
used to recover losses associated with negligent performance of a duty to conduct oneself according
to a certain standard or care. One of the earliest legal definitions of the standard of care expected of
all business participants (licensed professionals and non-professionals) is given below:

“[T]o exercise the average degree of skill, care and diligence exercised by members of
the same profession, practicing in the same or a similar locality, in the light of the present
state” (Gillette v. Tucker, 65 N.E. 865 (Ohio 1902)).

The following pages will explore two separate standards of care within the construction industry:
(1) the engineering standard of care, and (2) the construction standard of care.

A design professional is held to a higher “professional” engineering standard of care than

other construction participants since it must be professionally licensed to practice its craft. Design
professionals in the construction industry consist of engineers and architects, often referred to as
“A/Es” when they are acting together under the same firm or in a joint venture. The discussions
herein will refer to a design professional’s standard of care as an “engineering” standard of care.
However, the standard of care concept remains the same for any design professional whether it is
an engineer, architect, or A/E. An engineering standard of care can be established through direct
contract language, but if it is not, an engineer will still be required to act according to a standard of
care implied by tort law outside of its contractual obligations.

A contractor is also responsible for performing its work according to a certain “construction”
standard of care. Contracting parties are free to specify what this standard will be within the contract
documents, but if they do not, a contractor will still be required to install its work without negligence
according to an implied standard of care through tort law.

Ultimately, all construction participants are held to a standard of care pertaining to negligence
standards implied by law. Regardless of whether or not the negligence in question is professional
negligence, a claimant must be able to establish the following for recovery:

54
 “[A]n action in negligence may be maintained upon the plaintiff’s showing that the
defendant owed a duty to him, that the duty was breached, and that the breach
proximately caused an injury which resulted in actual damages…Duty and liability are
only imposed where both the plaintiff and the risk are foreseeable to a reasonable
person” (Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 677 P.2d 1292 (Ariz. 1984)).

The above language sets forth the parameters by which any contractual party can be held liable
to another for its negligent failure to fulfill a duty implied by law.

Standards of care in the construction industry involve several complex applications of contract
and tort law. Notwithstanding the difficulties in predicting how a court will accordingly rule, contracting
parties should clearly allocate the expected standards of care within the contract. Furthermore,
to the extent possible, contracting parties should attempt to include provisions which will provide
protection from economic losses caused by third-parties which are connected through the network
of contracts that tend to exist on a construction project.

Under the economic loss rule, a contractor is unable to collect its economic losses from an
engineer for a negligent design. However, if the contractor bargains with the owner to account for
the possibility of economic losses arising from the negligence of the engineer, recovery can be found
under the contractor’s agreement with the owner. The owner then has the opportunity to bargain with
the engineer to allocate the risk of economic losses caused by the engineer’s negligence. This type
of contracting strategy is consistent with the attitude of many courts that enforce the economic loss
rule.

Figure 13 (next page) displays the engineering standard of care legal issues and considerations
flow chart. This flow chart attempts to capture the general attitude that the U.S. judicial system has
assumed. Contracting parties should use the flow chart to educate themselves on the major issues
and considerations involving the engineering standard of care as generally perceived by the U.S.
judicial system. The chart adheres to the general or ordinary negligence rules of recovery.

When an engineer allegedly negligently fails to perform its professional design services according
to the standard normally expected, a claimant must first prove that the actions or inactions of the
engineer proximately caused the claimant’s injury. Next, the source of the allegedly breached duty
of care must be determined. If the standard of care duty expected was established in a contract, the
claimant will not be able to recover solely economic losses if the court strictly applies the economic
loss rule (applies to one-to-one and third-party contractual relationships). If the damages are physical
in addition to economical, the claimant will be able to pursue a claim under tort law regardless of
what the contract states pertaining to the expected standard of care. If the source of the breached
standard of care arises outside of the contract in the first place, the claimant will also be able to
pursue its negligence claim.

The next step in pursuing a claim is to determine whether or not the engineer acted “reasonably”
and “competently” as other engineers would have acted in similar circumstances. This determination
will typically require expert testimony unless the actions or inactions of the engineer are so obviously
negligent that any common “layperson” would come to the same conclusion. If the engineer acted

55
 No
Identify A proximate
Designer liable due to
contract risk: causal
implied professional
relationship
standard of care?
Engineering exists
between the
Standard of designer’s Yes No
Care actions or
inactions and No Designer acted Yes
the claimant’s competently*
injury? Breach of and reasonably* An express
standard of as other disclaimer is
care duty designers enforced by
Yes arises from No would have No Yes
the court or
the designer’s acted in the the claimant
contract? Breach same deviates Affidavit
results circumstances? Yes
from the of merit
solely in No See
Yes design? required
56

economic No Yes
damages?
by the Affidavit Fig. 14…
No state**? of merit Designer owed a
Yes filed? duty (e.g., as
Yes construction
Court manager) to the
* Typically requires expert testimony speaking as to whether adopts the No claimant outside of
or not a reasonably prudent design professional should economic its professional
have foreseen the consequences of the acts or omissions loss rule? design capacity
per the “foreseeable harm rule” (ordinary negligence
** Affidavit of merit not required when: (1) state legislature can be claimed)?
doesnot require one, or (2) breach of standard of care duty
so obvious that no expert is needed to establish burden No
of proof
Yes No

Figure 13. “Engineering Standard of Care” Legal Issues and Considerations Flow Chart
“reasonably” and “competently,” the claim will not be able to proceed. However, if the engineer failed
to conduct itself accordingly, the court may still bar the claim if an express disclaimer exists in the
contract, or the injury resulted from the contractor’s deviation from the engineer’s design. If neither of
these exceptions applies, the claim will proceed.

If required, an affidavit of merit must have been filed if a negligence claim based on the professional
standard of care expected is to be successful. If the negligence is so obvious that an expert is not
required, however, an affidavit of merit may not be required. If the affidavit of merit is not required,
or it is required and it is obtained and filed, the designer will typically be held responsible for the
damages produced by its negligence in acting according to the engineering standard of care. If the
affidavit is required but not filed, a claimant will need to establish a separate independent duty of
care apart from the professional duty of care in order to proceed with a claim. If this type of separate
duty can be established, recovery will be governed by Figure 14.

Figure 14 (next page) displays the construction standard of care legal issues and considerations
flow chart. Similar to Figure 13, this flow chart adheres to the general or ordinary negligence rules of
recovery. Again, this flow chart attempts to capture the general attitude that the U.S. judicial system
has assumed.

When a contractor allegedly negligently fails to perform its services according to the standard
normally expected, a claimant must first prove that the actions or inactions of the contractor
proximately caused the claimant’s injury. Next, the source of the allegedly breached duty of care must
be determined. If the standard of care duty expected was established in a contract, the claimant will
not be able to recover solely economic losses if the court strictly applies the economic loss rule. If
the damages are physical in addition to economical, the claimant will be able to pursue a claim under
tort law regardless of what the contract states pertaining to the expected standard of care. If the
source of the breached standard of care arises outside of the contract in the first place, the claimant
will be able to pursue its negligence claim.

The next step in pursuing a claim is to determine whether or not the contractor acted “reasonably”
and “competently” as other contractors would have acted in similar circumstances. This determination
will typically require expert testimony unless the actions or inactions of the contractor are so obviously
negligent that any common “layperson” would come to the same conclusion. If the contractor acted
“reasonably” and “competently,” the claim will not be able to proceed. However, if the contractor
failed to conduct itself accordingly, the court may still bar the claim if the defenses of assumption of
risk or contributory negligence apply. If neither of these defenses applies, the claim will proceed and
the contractor will be liable for the negligent fulfillment of its construction standard of care.

57
 No
Identify A proximate Contractor liable due
contract risk: causal to implied professional
relationship standard of care?
…Cont. from exists
between the Yes No
Figure 13 contractor’s
actions or Contractor
inactions and No acted
the claimant’s competently*
Breach of and reasonably* Yes
injury?
standard of as other
care duty contractor Defenses of
Yes arises from the No would have assumption
contractor’s acted in the of risk or
contract? Breach contributory
same
results negligence*
circumstances?
solely in No
Yes economic
** apply ?
No
58

damages? Court No Yes

adopts the
Yes economic
loss rule?

Yes No

* Also may apply to designer in a construction manager role

** Typically requires expert testimony speaking as to whether or not reasonably prudent
contractor should have foreseen the consequenof the acts or omissions per the
“foreseeable harm rule”
*** Comparative negligence used in many states, and will allow recovery proportional to
contractor’s contribution of negligence

Figure 14. “Construction Standard of Care” Legal Issues and Considerations Flow Chart
Chapter 4: Conclusions
Inappropriate allocation of risk can result in financial consequences and ultimately litigation.
Contracting parties may find themselves blindsided by a court’s interpretation and resultant ruling
concerning a contract clause. This implementation resource provides industry participants with
contract language tables that may assist in drafting agreeable clauses that will keep the parties out
of court in the first place. Further, the legal research laid out in this publication will educate parties
concerning the legal issues and considerations as they are commonly viewed by the U.S. courts.
By examining the seemingly pervasive opinions of the current courts, contracting parties can obtain
a better understanding of how the “hot-button” risks will be allocated if the project does end up in
litigation.

When trying to establish risk allocation clauses, especially for parties unfamiliar with dealing with
contracts, the contract language itself can often become a confusing obstacle to incorporating such
clauses. Due to this understanding, the team created its contract language tables for each of the 14
“hot-button” risks researched. These cooperatively constructed tables provide contract language
seemingly favorable to the buyer (e.g., owner) and seller (e.g., contractor), as well as language that
may provide a compromising position between both sides. It is highly recommended that parties
involved with drafting or approving a risk allocation clause review the appropriate contract language
table before signing any documents.

As part of the research team’s task to develop a product to aid the construction industry in
“contracting to appropriately allocate risk,” the team felt the necessity to establish a base from which
to compare risk allocation. Consequently, the base was chosen to be situations where no contractual
allocation of risk was conducted and the resulting court rulings when that risk came to fruition. For
some of the “hot-button” risks, this analysis was not entirely possible. For example, a no damages for
delay clause and its associated risks of enforceability become non-existent if the clause is removed
from the contract, since owner-caused delays would subsequently result in equitable adjustment.
Therefore, the legal research for these types of risks focused on observing the exceptions courts
have carved out regarding the enforceability of the related contractual clauses.

Legal issues and considerations flow charts were developed for 10 researched construction
risks, each specifying either the allocation of a risk or the recoverability of damages caused by a risk,
given various circumstances and the existence and/or non-existence of contractual clauses. From
these charts, it becomes rather evident that there is far less ambiguity and chance of no damage
relief when appropriately drafted risk allocation clauses are included in the contract between the
owner and contractor.

The research team developed the Two-Party Risk Assessment and Allocation Model with the
intention of the contract language tables and legal research being used as risk allocation tools after
one of the 14 “hot-button” risks was cooperatively identified as a high concern by the two-party
risk assessment process. However, the research team realizes that not all industry participants will
embrace the model with the rigor that is intended. As a result, some parties may find it most useful
to utilize the contract language tables and legal research as legal perspective references on risk
allocation apart from the Two-Party Risk Assessment and Allocation Model’s full application. At the

59
very least, the research team recommends that contracting parties make this publication available
to its employees, especially the next generation, for the purpose of knowledge-transfer and overall
education on the widely misunderstood legal aspects of risk allocation.

Construction will always have risk associated with it, however, careful drafting of construction
contract clauses can allocate risk where it appropriately belongs and therefore eliminate some of the
uncertainty and legal arguing of common law principles if something does go wrong on the project.
With pre-contract meetings and discussions with the use of these CII materials, inappropriately
allocated and unallocated construction risk claims may be significantly decreased on a variety of
construction projects.

60
References

7200 Scottsdale Rd. Gen. Partners v. Kuhn Farm Mach., 909 P.2d 408 (Ariz. Ct. App.1995).
Clough, Richard Hudson, and Glenn A. Sears. Construction Contracting. 6th ed. New York:
Wiley, 1994. 204.
Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 677 P.2d 1292 (Ariz. 1984).
Gillette v. Tucker, 65 N.E. 865 (Ohio 1902).
Holmes, Oliver Wendell. The Common Law. Boston: Little, Brown, and Co., 1881. 1.
Interface Consulting International, Inc. “Constructive Acceleration.” Industry Research:
Articles. Interface Consulting Articles. 6/30/2005 <http://www.interface-consulting.com/
articles/constructive_acceleration.html>.
Johnson v. Chicago & P. Elevator Co., 105 Ill. 462 (1882).
Merriam-Webster, Inc. The Merriam-Webster Dictionary. 50th anniversary ed. Springfield,
Mass.: Merriam-Webster, 1997.
N. Ind. Pub. Serv. Co. v. Carbon County Coal Co., 799 F.2d 265 (7th Cir. 1986).
Perlman v. Pioneer Ltd. P’rship, 918 F.2d 1244 (5th Cir. 1990).
Sweet, Justin, and Marc M. Schneier. Legal Aspects of Architecture, Engineering, and the
Construction Process. 7th ed. Toronto, Ontario, Canada: Nelson, 2004. 65-66, 245, 437,
593, 685, 688.
United States v. Spearin, 248 U.S. 132 (1918).
United States v. Metric Constructors, Inc., 480 S.E.2d 447 (S.C. 1997).
Wallace, Brian D. “Is the AIA’s Mutual Waiver of Consequential Damages Really Mutual?”
Fairfield and Woods, P.C. (1998). 6/20/05 <www.fwlaw.com/aia.html>.
Wray, Russel W. “Constructive Acceleration.” FindLaw Library (April 2000). Wray & Pierce, LLP.
6/30/2005 <http://library.findlaw.com/2000/Apr/1/129764.html>.

61
Contracting to Appropriately Allocate Risk Research Team
Shameem Akhtar, Zachry Construction
Rick Bradford, Bechtel, Chair
Roland Frenck, U.S. Department of Energy
Jim Graham, ExxonMobil
** Awad Hanna, University of Wisconsin–Madison
William McCauley, Shell Global Solutions
Tom Miller, Zurich
DeWitt Patterson, AMEC
Joseph Peer, BE&K
Phil Peterson, Bibb & Associates
Stanley Scofield, U.S. Department of State
Rob Smith, CH2M HILL
Robert Smith, Wickwire Gavin
* Justin Swanson, University of Wisconsin–Madison
* Gregory Thomas, Fisk Electric

Past Members
Susan Alexander, Abbott
Frank Erichson, Fluor, past Chair
Jenny Morrow, AZCO INC.
Warren Nelson, GlaxoSmithKline
Curtis Strauss, ABB Lummus Global

* Principal Authors
** Principal Investigator

Editor: Rusty Haggard

Construction Industry Institute®
The University of Texas at Austin
3925 W. Braker Lane (R4500)
Austin, Texas 78759
construction-institute.org

(512) 232-3000
FAX (512) 499-8101
Bureau of Engineering Research
The University of Texas at Austin