Preface xix
1 Law and Government 1
1.1 Introduction 1
1.1.1 The Powers of Governments 1
1.1.2 City and County Governments 2
1.1.3 The Powers of the Federal Government 2
1.2 The Sources and Hierarchy of Law 3
1.2.1 The Constitution 3
1.2.2 Statutes and Ordinances 3
1.2.3 Agency Regulations 4
1.2.4 International Treaties 4
1.2.5 Appellate Court Opinions 4
1.3 The American Judicial System 4
1.3.1 Structure of the Court Systems 5
1.3.2 Federal Trial and Appeals Courts 5
1.3.3 State Trial and Appeals Courts 6
1. 4 Common Law 6
1.4.1 Stare Decisis 7
1.4.2 Restatements of the Law 7
1.5 Legal Codes 8
1.5.1 Uniform Codes 8
1.5.2 The Uniform Commercial Code 9
1.6 Legal Doctrines 9
1.7 Choice-of-Law Clauses 10
1.8 Criminal Law versus Civil Law 11
1.9 Cause of Action 11
1.10 Summary Judgment 12
2 Basic Legal Principles 15
2.1 Legal Issues in Construction 15
2.2 Principles of Contract Law 15
2.2.1 Unilateral Contracts versus Bilateral Contracts 16
2.2.2 Oral Contracts 16
2.2.3 Third-Party Beneficiaries 17
2.2.4 Contract Interpretation 17
2.3 Principles of Agency Law 21
2.3.1 Apparent Authority 21
2.3.2 The Principal’s Liability for the Agent’s Acts 22
2.3.3 Ratification 22
2.4 Principles of Tort Law 23
2.4.1 Intentional Torts 23
2.4.2 Unintentional Torts (Negligence) 23
2.4.3 Strict Liability 27
2.4.4 Misrepresentation 28
3 Project Participants 29
3.1 The Owner 29
3.1.1 Access to the Building Site 30
3.1.2 Restrictions on Use of the Property 31
3.2 The Design Professional Team 31
3.2.1 Site Evaluation Consultants 32
3.2.2 The Geotechnical Consultant 33
3.3 The Construction Team 33
3.3.1 Subcontractors and Suppliers 34
3.4 Construction Lenders 34
3.4.1 Collateral Assignment to Lender 35
3.4.2 Other Lender Requirements 35
3.4.3 Construction Loans 36
3.4.4 Bond Financing 37
4 Project Delivery Systems 39
4.1 Design-Bid-Build 39
4.2 Multiple Primes 41
4.3 Construction Management 41
4.3.1 Agency Construction Management 42
4.3.2 Construction Management At-Risk (CMAR) 42
4.4 Design-Build 43
4.4.1 Design-Build Proposals 44
4.4.2 Advantages and Disadvantages of Design-Build 45
4.4.3 Bridging Consultants 46
4.5 Engineer-Procure-Construct (EPC) 46
4.6 Turnkey Construction 47
4.7 Integrated Project Delivery (IPD) 47
4.8 Fast-Track Construction 47
4.9 Public-Private Partnerships 48
4.9.1 History of Public-Private Partnerships 49
4.9.2 Constraints on Public-Private Partnerships 49
5 Construction Contracts 51
5.1 The Construction Contract 51
5.1.1 Prebid Conferences 51
5.1.2 Right to Reject Bids 52
5.2 The Contract Documents (Owner-Contractor) 52
5.2.1 The Contractor’s Bid 53
5.3 Conflicts between the Documents 54
5.4 Errors in the Documents 54
5.4.1 Latent Discrepancies 55
5.5 Specific over General; Written over Printed 56
5.6 Interpretation against Drafter 56
5.7 Specifications 57
5.8 Description of the Work under a Construction Contract 57
5.9 Third-Party Beneficiaries 58
5.10 Industry Standard Forms versus Custom Forms 58
5.10.1 Drafting Custom Forms 59
5.10.2 AIA Contract Documents 60
5.10.3 Engineers Joint Contract Documents Committee (EJCDC) 62
5.10.4 Consensus DOCS 63
5.10.5 Comparing the AIA, EJCDC, and Consensus DOCS Documents 64
5.10.6 AGC Forms 65
5.10.7 Other Industry Standard Forms 65
5.11 Commencement of Work Prior to Contract 65
5.11.1 Letters of Intent 66
6 The Design Process 67
6.1 Design Responsibilities 67
6.1.1 Contractor’s Responsibility for Design 67
6.1.2 Value Engineering 68
6.2 The Owner’s Program 68
6.3 The Design Agreement (Owner-A/E) 68
6.3.1 Schematic Design Phase 69
6.3.2 Design Development Phase 69
6.3.3 Construction Documents Phase 69
6.3.4 Bidding or Negotiation Phase Services 70
6.3.5 Construction Phase Services 70
6.3.6 Basic Services versus Additional Services 71
6.3.7 The A/E’s Compensation 71
6.4 Standard of Care Applicable to Design Services 71
6.4.1 Contractual Standard of Care 72
6.4.2 Proving Violation of the Standard of Care 73
6.4.3 Implied Warranties 73
6.4.4 Designing to the Owner’s Budget 74
6.4.5 The A/E’s Liability for its Estimate 74
6.5 Ownership of the Design Documents 75
6.5.1 Use of the Plans and Specifications 75
6.6 Termination of the Design Agreement 76
7 The Procurement Process 77
7.1 Selection of Contractors for Public Projects 77
7.1.1 The Bid Package 78
7.1.2 Duty to Award to the Lowest Bidder 78
7.1.3 Bid Responsiveness 78
7.1.4 Responsible Bidder 79
7.1.5 Bid Protests 80
7.1.6 Bid Security 81
7.1.7 “Best Value” Awards 81
7.2 Selection of Design Professionals 82
7.3 Alternatives to Design-Bid-Build in the Public Sector 83
7.3.1 Design-Build Construction in the Public Sector 83
7.4 The Federal Acquisition Regulation (FAR) 84
7.5 Procurement on Private Projects 85
8 Pricing Construction Projects 87
8.1 Fixed-Price Contracts 87
8.1.1 Fundamental Characteristic of a Fixed-Price Contract 87
8.1.2 Allowances 88
8.1.3 Material Price Escalation Clauses 88
8.1.4 Index Pricing 89
8.2 Cost-Plus Contracts 89
8.2.1 Labor 90
8.2.2 Subcontracted Work 90
8.2.3 Heavy Equipment 91
8.2.4 Small Tool Allowance 91
8.2.5 Reasonableness or Necessity of Costs Incurred 91
8.2.6 Contractor’s Overhead and Profit 92
8.2.7 Estimates and Cost-Plus Contracts 92
8.2.8 Timely Payment Discounts 93
8.2.9 Audit Rights 93
8.3 Cost-Plus with Guaranteed Maximum Price 93
8.4 Unit-Price Contracts 94
8.4.1 Variation in Estimated Quantities (VEQ) Clauses 94
8.5 Unbalanced Bidding 95
8.6 Bidding When the Design Is Incomplete 96
9 Subcontractors and Suppliers 97
9.1 Subcontractors versus Suppliers 97
9.2 Owner’s Control over Subcontractor Selection 98
9.3 Subcontractor Bids 98
9.3.1 Enforcing a Subcontractor’s Bid 99
9.3.2 The Subcontractor’s Right to Enforce Its Bid 100
9.4 Incorporation by Reference 100
9.5 Flow-down and Flow-up Provisions 101
9.5.1 Rights and Liabilities of the Parties under Flow-down Provisions 101
9.6 Duty to Cooperate and Coordinate Subcontract Work 102
9.6.1 Limiting the Liability for Coordination 102
9.6.2 Coordination of Multiple Primes 103
9.7 Subcontractor Payment 103
9.7.1 “Pay-If-Paid” versus “Pay-When-Paid” 104
9.8 Subcontractor Claims against the Owner 105
9.8.1 The Pass-through System 106
9.8.2 Liquidating Agreements 106
9.9 Conditional Assignment of the Subcontracts to the Owner 107
9.10 Minority and Disadvantaged Business Programs 108
9.10.1 Federal Minority and Disadvantaged Business Programs 109
9.10.2 Agency DBE Programs 111
10 Time for Performance 113
10.1 Time Is of the Essence 113
10.1.1 Time-Is-of-the-Essence Clauses in Construction Contracts 114
10.2 Date of Commencement/Time for Completion 114
10.2.1 Delays in Commencement of the Work 115
10.2.2 Waiver of Time for Completion 115
10.3 Substantial Completion 116
10.3.1 The Significance of Substantial Completion 116
10.3.2 Establishing Substantial Completion 117
10.4 Final Completion/Final Payment 117
10.4.1 Acceptance of Defective Work 118
10.5 Delays 119
10.5.1 Determining Whether a Delay Was within a Party’s Control 120
10.5.2 Delays Due to Weather 121
10.5.3 Concurrent Delays 122
10.6 Liquidated Damages 122
10.7 Constructive Acceleration 124
10.8 Right to Finish Early 124
10.9 Milestones 125
11 Construction Scheduling 127
11.1 Bar Charts 127
11.2 Critical Path Scheduling 128
11.2.1 Activity Logic 128
11.2.2 Arrow Diagramming 128
11.2.3 Precedence Diagramming 129
11.2.4 As-Planned (Baseline) Schedule 129
11.2.5 Float 130
11.2.6 Critical Path 130
11.2.7 Multiple Calendars 131
11.3 Scheduling Specifications 131
11.4 Schedule Updates 132
11.5 Resource Leveling 132
11.6 CPM-Based Methods for Proof of Delay Claims 133
11.6.1 Total Time Analysis 133
11.6.2 Impacted As-Planned (“What-If”) 134
11.6.3 Collapsed As-Built (“But For”) 134
11.6.4 As-Planned versus As-Built 134
11.6.5 Windows Analysis 135
11.7 Expert Witness Testimony 135
11.8 Using CPM to Estimate Extensions of Time 136
11.9 Using Bar Charts to Prove Delay Claims 137
12 Contract Administration 139
12.1 The A/E’s Role in Contract Administration 139
12.2 A/E’s Liability for Contract Administration 140
12.2.1 Approval of Shop Drawings and Other Submittals 140
12.2.2 Site Visits and Inspections 141
12.2.3 AIA B101 Provisions 142
12.2.4 The Right to Stop Work 142
12.2.5 Approval of Progress Payments 143
12.2.6 Responding to Change Order Requests 144
12.2.7 Requests for Information, Interpretations, and Clarifications 144
12.3 A/E’s Role in Contractor Termination 144
12.4 Initial Decision Maker (IDM) 145
13 The Payment Process 147
13.1 Progress Payments 147
13.1.1 Schedule of Values 147
13.1.2 The Application for Payment 148
13.1.3 Certification of Payment 148
13.2 Retainage 149
13.2.1 Payment of Subcontractor’s Retainage 150
13.2.2 Claims on Retainage 150
13.3 Accord and Satisfaction 150
13.3.1 Payment of an Accord by Check 151
13.4 Joint Checks 152
13.4.1 Joint Payee versus Alternative Payee 152
13.5 Title Insurance 152
13.6 Obligations of the Lender 153
13.7 Evidence of Financing 153
13.8 Prompt Payment Acts 154
13.8.1 The Progress Payment Request 154
13.8.2 Payment on Subcontracts 154
13.9 The Owner’s Payment Obligation on Private Construction 155
13.10 The False Claims Act 155
13.10.1 Liability for False Claims 156
13.10.2 Prosecution of False Claims 156
13.10.3 State False Claims Act 157
14 Changes to the Work 159
14.1 Contract Changes 159
14.1.1 Construction Change Directives 160
14.2 Pricing Change Orders 160
14.2.1 Determination of Price by a Third Party 161
14.2.2 Schedule Adjustments 161
14.3 Constructive Changes 161
14.3.1 Owner’s Direction or Improper Rejection of Work 162
14.3.2 Notice Requirements for a Constructive Change 162
14.3.3 Waiver of Notice Requirement 163
14.3.4 Extra Work versus Additional Work 163
14.4 Federal Government Contracts 163
14.4.1 Equitable Adjustments 164
14.4.2 Escrow of Bid Documents 164
14.5 Authority to Issue Changes 165
14.5.1 Apparent Authority and Ratification 165
14.6 Duty to Perform the Changed Work 166
14.7 Reservation of Rights 166
14.8 Changes Clauses in Subcontracts 168
14.9 Documentation of Costs 168
14.10 Cardinal Changes 169
14.10.1 The Contractor’s Options 169
15 Differing Site Conditions 171
15.1 The Purpose of the Differing Site Conditions Clause 171
15.2 Differing Site Conditions Claims 172
15.2.1 Type I—Conditions Materially Different Than Indicated 172
15.2.2 Type II—Conditions of an Unusual Nature 173
15.3 Limitations on Claims for Differing Site Conditions 174
15.3.1 Duty to Make a Site Inspection/Duty to Investigate 175
15.3.2 Disclaimers 175
15.3.3 Notice 177
15.3.4 Waiver of Claims 177
15.4 Variations in Estimated Quantities Clause 177
15.5 Geotechnical Baseline Summary Report 178
15.6 Hazardous Materials 178
15.7 Tort and Breach-of-Contract Actions 178
15.7.1 Misrepresentation (Intentional or Negligent) 179
15.7.2 Owner’s Breach of Implied Warranty of Plans and Specs 179
15.7.3 Failure to Disclose Superior Knowledge 179
15.7.4 Mutual Mistake 180
16 Termination of the Construction Contract 181
16.1 Unilateral Termination 181
16.2 Contractual Termination Provisions 182
16.3 Termination by the Contractor for Cause 182
16.4 Termination by the Owner for Cause 183
16.4.1 Notice and Opportunity to Cure 183
16.5 Wrongful Termination 184
16.6 The Role of the Performance Bond Surety 185
16.7 Termination for Convenience 186
17 Mechanic’s Liens 187
17.1 Purpose of a Mechanic’s Lien 187
17.2 Procedures for Filing a Lien 188
17.3 Lien Entitlement 188
17.3.1 Liens for Services 189
17.3.2 Liens for Materials 189
17.4 Enforcement of the Lien 190
17.4.1 Priorities 190
17.4.2 Bonding Off 191
17.5 Interests Subject to a Lien 191
17.5.1 Subcontractor and Supplier Claims 192
17.5.2 Amount of the Lien 192
17.6 Lien Waivers 193
17.6.1 No-Lien Contracts 194
17.7 Rights of Owners and Third Parties 194
17.8 The Effect of Bankruptcy on a Mechanic’s Lien 194
17.9 Trust Fund Statutes 195
17.10 Stop Notices 195
17.11 Liens on Public Property 195
18 Construction Insurance 197
18.1 Types of Insurance 197
18.2 Commercial General Liability 198
18.2.1 Bodily Injury and Property Damage 198
18.2.2 Exclusions to Coverage 199
18.2.3 Additional Insured Status 200
18.3 Builder’s Risk Insurance 200
18.4 Workers’ Compensation Insurance 201
18.5 Professional Liability Insurance 201
18.6 Wrap-up Insurance Programs 202
18.7 Waiver of Subrogation 202
19 Surety Bonds 205
19.1 Use of Surety Bonds in the Construction Industry 205
19.1.1 Bid Guarantees 206
19.1.2 Payment Bonds 206
19.1.3 Performance Bonds 208
19.2 Rights and Remedies of Sureties 208
19.2.1 Indemnity Agreements 209
19.2.2 Discharge of the Surety’s Obligations 209
19.3 Bonding Requirements 210
20 Liability for Defective Construction 211
20.1 Determining Liability 211
20.2 Owner Claims against the Contractor 212
20.2.1 Warranties 212
20.2.2 Notice Requirements 213
20.2.3 Tort Claims 213
20.3 The Spearin Doctrine 214
20.3.1 Application of the Spearin Doctrine 214
20.3.2 Limitations on Spearin 215
20.4 The A/E’s Liability for Defective Construction 216
20.5 Affirmative Defenses 217
20.5.1 Statutes of Limitation 217
20.5.2 Statutes of Repose 218
21 Calculations of Damages 221
21.1 Compensatory Damages 221
21.1.1 Consequential Damages 222
21.2 Punitive Damages 222
21.3 Duty to Mitigate Damages 223
21.4 Owner’s Damages 223
21.4.1 Owner’s Damages for Late Completion 223
21.4.2 Economic Waste 224
21.4.3 Betterment 224
21.5 Contractor’s Damages 226
21.5.1 Equipment Costs 226
21.5.2 Home Offi ce Overhead 227
21.5.3 Cost Increases for Labor and Materials 228
21.5.4 Methods of Estimating Loss of Productivity 228
21.6 Limitation of Liability 230
21.6.1 Exculpatory Clauses 230
21.6.2 Indemnification Agreements 231
21.6.3 Limitation-of-Liability Clauses 232
21.6.4 Waiver of Consequential Damages 233
21.7 Specific Performance 234
21.8 Tort Claims 234
21.9 Recovery of Damages in the Absence of an Express Contract 235
21.9.1 Reliance Interest—Promissory Estoppel 235
21.9.2 Implied-in-Fact Contracts—Quantum Meruit 236
21.9.3 Restitution Interest—Unjust Enrichment 236
21.9.4 Quantum Meruit versus Unjust Enrichment 237
22 The Economic Loss Doctrine 239
22.1 Tort versus Contract Law 239
22.1.1 Definition of Economic Loss 240
22.1.2 Development of the Economic Loss Doctrine 240
22.1.3 Basis for the Doctrine 241
22.1.4 Public Policy Considerations 241
22.1.5 Strict Application of the Doctrine 242
22.1.6 Exceptions to the Economic Loss Doctrine 242
22.2 Claims of Defective Construction Products 243
22.2.1 Damage to Other Property 244
22.3 Claims of Defective Construction Services 244
22.3.1 Claims of Defective Design Professional Services 245
22.4 Potentially Dangerous Products (Risk of Harm Exception) 246
22.5 Negligent Misrepresentation 247
22.5.1 Negligent Misrepresentation Claimants 247
22.5.2 Tort versus Contract Claims for Negligent Misrepresentation 248
23 Alternative Dispute Resolution 249
23.1 Arbitration 249
23.1.1 Arbitration Clauses 250
23.1.2 Arbitration Statutes 250
23.1.3 Arbitration Organization Rules 251
23.1.4 Prehearing Activities 251
23.1.5 Selection of Arbitrators 252
23.1.6 The Arbitration Hearing 252
23.1.7 The Award 252
23.1.8 Appealing the Award 253
23.1.9 Costs of Arbitration 254
23.1.10 Typical Schedule for Arbitration 254
23.1.11 Joinder and Consolidation 254
23.1.12 Waiver of Arbitration Rights 255
23.1.13 Effect of Arbitration on the Surety 256
23.2 Litigation versus Arbitration 256
23.3 Mediation 257
23.4 Other Types of Alternative Dispute Resolution 258
23.4.1 Med/Arb 258
23.4.2 Mini-Trial and Summary Proceedings 258
23.4.3 Dispute Resolution Boards 259
23.4.4 Standing Neutrals 260
23.5 Dispute Prevention 260
Appendix A: List of Abbreviations 261
Appendix B: Table of Cases 265
Appendix C: Understanding Case Citations 267
Glossary 271
Index 279
