Given current market conditions, making capital and new projects difficult to come by, general contractors (the Contractor) and their subcontractors are attempting to wring every additional dollar they can out of existing projects. Because Contractors are on the hunt for opportunities to increase the value of their current projects, owners and developers of real property (Owners) must be vigilant in managing ongoing construction projects. When it comes to making sure that the Contractor adheres to the terms of the contract that the Owner and Contractor spent significant time and energy negotiating, it is critical to take the following steps to prevent or minimize claims and delays:
1. The Owner must regularly monitor the Contractor’s performance and document both the progress and quality of the Contractor’s work while the project is under construction.
Once the contract is signed and the project gets underway, the Contractor should keep contemporaneous records of how the work is progressing. The Owner should monitor the Contractor’s progress while the work is underway. To do so, the Owner should regularly review the Contractor’s daily reports, logs, and records (including submittal logs, requests for information, buyout logs, etc.). The Owner should also regularly attend and participate in on-site meetings between the Owner, Architect, and Contractor (OAC Meetings). This means preparing an agenda for each meeting, documenting issues that are raised during the meeting, addressing any problem areas, and recording and/or correcting minutes from the OAC Meetings. The Owner should regularly visit the project site to document the progress and quality of the work being performed. The Owner can do so by taking pictures of what is happening (or not happening) on site, checking video footage (if applicable) of the work as it is performed, and reviewing the Contractor’s quality control log.
Another important part of monitoring the Contractor’s performance is closely reviewing the Contractor’s Applications for Payment. The Owner should track closely what percentage of the work the Contractor claims to have completed and coordinate that review with reports from the architect and the project lender’s inspector. Before issuing payment, the Owner must confirm that the Contractor has complied with all the necessary conditions for payment (Contractor has submitted an executed, fully supported Application for Payment, along with all applicable lien waivers, etc.). The Owner should verify that retainage is being withheld in accordance with the requirements of the contract. This means double checking the terms of the construction contract to confirm what items are not subject to retainage and whether retainage steps down once a certain percentage of the contract has been completed.
The Owner should regularly evaluate the project schedule and the Contractor’s progress toward construction milestones when reviewing the Contractor’s Applications for Payment. The Owner’s evaluation of the schedule should also involve regularly and thoroughly reviewing any schedule updates prepared by the Contractor (which should be provided with monthly progress reports and with Applications for Payment). The Owner should document any Contractor-caused delays and require the Contractor to provide a recovery schedule, and accelerate the performance of the work at the Contractor’s cost, to bring the project back on schedule. A Contractor’s failure to provide regular updates and progress reports may also be an indication that the Contractor is not properly managing the project.
As part of monitoring the project’s schedule, the Owner should also keep track of the number of weather days the Contractor has claimed. Only weather days that impact the project’s critical path justify an extension of the contract time. The Owner can confirm that the project has in fact experienced the number of weather delays the Contractor has reported by reviewing and evaluating weather data from the closest NOAA station and comparing that data to the evidence Contractor has provided to justify the claimed weather days. If the Contractor is reporting a greater number of weather days than the local weather data indicates should be expected, the Owner should immediately address the discrepancy with the Contractor in writing.
The Owner should review and respond to any proposed Change Orders in a timely fashion. This requires reviewing the Contractor’s proposed changes to the Scope of Work, the Contract Sum, and Contract Time closely and responding in writing to address each issue. The Owner should delete any extraneous terms and conditions that the Contractor may have included within the Change Order that contradict the language of the construction contract. If the Owner needs more information to evaluate whether a proposed Change Order is warranted, the Owner should request such additional information from the Contractor in writing.
After the Owner has carefully reviewed the proposed Change Order, the Owner must clearly communicate to the Contractor whether the proposed Change Order has been accepted or rejected. If the Owner rejects the Change Order, it should provide a simple statement to the Contractor explaining why the Contractor is not entitled to the proposed Change Order. Any agreed-upon Change Order should include language stating that the Change Order constitutes a full and final settlement of the issues addressed by that Change Order. Without this language included, the Owner leaves the door open for the Contractor to allege additional impacts to the Contract Time or Contract Sum from the same incident.
2. Avoid lien and payment-related issues
If the Contractor or a subcontractor files a lien against the project during the construction process, the project’s lender will stop approving draw requests until the project is lien free. To avoid curtailing the flow of funds, it is critical that the Owner take all necessary steps to protect itself from potential lien claims and ensure there are remedies available if a lien is actually filed. Provisions should be included in the construction contract to make sure that (1) the Owner can pay subcontractors and suppliers directly or by joint-check if the Owner receives notice that the Contractor is not paying downstream entities; (2) the Contractor is required to bond off any liens filed by subcontractors or suppliers and to indemnify the Owner against any costs incurred because of the lien filing; and (3) the Owner has the right to withhold payment from the Contractor to cover the costs associated with bonding off liens.
For projects located in Georgia, the Owner should file, or require the Contractor to file, a Notice of Commencement no later than 15 days after the work at the site starts. Recording the Notice of Commencement and posting a copy at the project site provides the Owner with protection from lien claims filed by lower-tier subcontractors by requiring those downstream entities to comply with extra procedural requirements before they are eligible to file liens against the project.
The Owner should also make sure that the Contractor is regularly submitting the appropriate lien waivers on behalf of itself as well as all of its subcontractors and suppliers with each Application for Payment. As subcontractors and suppliers complete their scope of work for the project, the Owner should verify that the Contractor has submitted final lien waiver forms on behalf of those subcontractors and suppliers. Once the project has been completed and the Work fully performed, the Contractor should submit a final lien waiver and a final affidavit confirming the Contractor has been paid all amounts owed for the performance of its services as part of the documentation closing out the construction of the project.
3. Enforce the terms of the construction contract related to claims
Last, but certainly not least, the Owner should ensure that the Contractor complies with the terms and conditions of the construction contract that relate to claims for additional time or money, such as notice requirements. If the Contractor fails to provide timely notice of a claim to the Owner, then the Owner loses its opportunity to help mitigate the impacts of the event that may have given rise to the Contractor’s claim. The construction contract should contain provisions requiring the Contractor to provide contemporaneous written notice to the Owner of any potential claim events, failing which such claim is waived.
The issues discussed above describe a few of the more common issues that arise on construction projects. Should an issue arise during construction of your project, Morris, Manning & Martin’s Construction Law Practice Group is experienced in helping clients negotiate the twists and turns that come with resolving construction-related issues and successfully completing a construction project. If you need any assistance with these or other issues on existing or future development projects, please contact Bruce Smith, chair of MMM’s Construction Law Practice Group, Colby Nelson, or JD Howard.