When companies look to expand or relocate facilities they usually do not have in-house personnel with the skills and expertise necessary to handle the design and construction of a new or expanded facility. Therefore, design and construction issues are often overlooked in the site selection process, as well as when a company looks to expand existing facilities.

In addition to the common concerns that the facility be built to specifications, according to schedule and within budget, there are numerous contractual issues that must be resolved before design and construction are commenced. These issues include everything from the basic contractual issues involved in the construction process to the more complicated issues surrounding Immigration and Naturalization Service employee documentation requirements, as well as compliance with numerous regulations such as the Americans with Disabilities Act.

Project Delivery Systems

After a company has decided to expand, either by selecting a new site or modifying existing facilities, it must choose the method of organization that will best produce the project. A Project Delivery System (PDS) refers to the arrangement chosen by the company's owner to produce the facility that meets its business requirements.

This arrangement, in its many different forms, defines the relationship framework between the owner and the various professionals needed to develop the project, which may include a designer or architect, a project manager, one or more general contractors and numerous subcontractors and suppliers.

The PDS encompasses the assignment of cost risk, payment terms, the types of interrelated agreements between the parties and the types of parties involved in the project. There are several common PDS frameworks, including the traditional design-bid-build, the design-build and the multiple primes framework.

The traditional PDS is the design-bid-build framework. In this framework, the owner first contracts with an architect/designer to produce the plans for the facility, and then separately contracts with a contractor to build the design. After a general contractor is selected, the general contractor then puts out portions of the project for bid, selects the best bids for different aspects of construction and oversees the work to completion.

A second PDS is the design-build framework. In this framework, the owner contracts with one entity for both design and construction, either a project manager or general contractor who provides design services. This enables the owner to efficiently deal with just one contract and often is more harmonious because it eliminates conflicts between the designer and the builder.

The design-build framework does have its shortcomings, however, in that the owner has just one entity to recover from in the event of loss, damage or delay. This framework may also lead to a higher overall price because the contractor is hired prior to the creation of the design, thus eliminating competitive bidding, which often results in lower costs.

A third PDS is the multiple primes framework, in which the owner contracts directly with numerous trade contractors. This framework is advantageous for the owner with in-house construction management personnel, or employees with such knowledge, because the owner acts as the general contractor, dealing directly with each subcontractor, which could result in reduced costs by eliminating the overhead and profit retained by a general contractor.

Construction Contract Basics

Even though construction projects involve multiple parties, the majority of the contracts created during the process are two-party contracts, with a network of contracts existing down the hierarchical chain, from owner to architect/designer or project manager, to the general contractor, to subcontractors and often between contractors and suppliers.

Despite this complex hierarchical network of contracts, the construction industry, more than most other industries, relies on standard form contracts. The Associated General Contractors (AGC) and American Institute of Architects (AIA) are two of the most common sources for these contracts. In general, however, each set of form contracts is skewed towards protecting the interests of members of the organization that prepared the forms – i.e., the AGC form contracts favor general contractors, while the AIA forms favor architects.

As a result, owners should not generally use standard form contracts without modifications to address the owner's particular project. Thus, it is essential, especially for large or complex projects, that the owner consult legal counsel to ensure that the contract documents adequately protect the owner's interests.

Legal counsel with particular expertise in construction law will be able to modify form contracts or draft new documents as needed, relying on their experience with other projects and knowledge of up-to-date laws and regulations applicable to the construction industry, in the most effective and cost efficient manner.

Construction contracts include many standard “boilerplate” terms and clauses that, although important, are not particularly contentious. There are, however, a number of less common provisions that are of increasing frequency and importance. These include incorporation clauses, indemnification clauses and alternative dispute resolution (ADR) clauses.

The incorporation clause (or pass through clause) incorporates contractual terms from other documents into the contract. This type of clause is common in contracts between the general contractor and its subcontractors because it incorporates by reference all or some of the terms contained in the contract between the owner and the general contractor. An incorporation clause ensures that contractual terms that are essential to the owner are contained not only in the contract between the owner and the general contractor, but also in each successive contract between the general contractor and its subcontractors, thereby eliminating a source of contention.

An indemnification clause in its most common form indemnifies the owner for any damages caused by the contractor, any subcontractor or other party for whom the contractor may be liable. Indemnification clauses can also protect the owner for losses arising out of a breach of the contract. In some cases the owner can even receive indemnification for damages caused by its own actions or inaction, but this comprehensive indemnification must be explicitly and unambiguously stated.

Many construction contracts now provide for ADR, through arbitration, mediation or partnering clauses, inserted primarily in an attempt to settle disputes without resorting to costly litigation. Arbitration clauses should be carefully crafted to allow for joining all necessary parties into one arbitration proceeding (many standard forms do not allow joinder, which may result in duplicative proceedings and added costs), to provide for arbitration of certain specific matters only and to provide that the arbitration decision will be binding.

Mediation, another form of ADR, is an informal process in which a neutral third party works with the opposing parties to reach a voluntary, negotiated resolution of a dispute. Partnering, one of the newest forms of ADR, involves a combined effort of all parties to the construction project. The group is led by a neutral party, with the goal of intervening early to solve disputes before they escalate.

Limiting Liability and Risks

The primary method of limiting liability and allocating risk in a construction project is through the use of insurance. The majority of construction contracts require most, if not all, parties to purchase and maintain insurance policies, including general contractors and subcontractors. In addition, owners require that they be named as an additional insured in all insurance policies of lower-level contractors.

One decision the owner often faces is whether to obtain comprehensive loss and damage insurance itself, or to pass off the cost by requiring the general contractor to obtain it. Although the owner may gain some advantages by pushing off the requirement to the general contractor, it is generally preferable for the owner to garner this comprehensive coverage itself.

Because the owner will ultimately pay the cost of the insurance in any event, either up-front by obtaining the coverage itself or in the form of higher bids or costs on the project if the general contractor obtains the insurance, the owner may want to go ahead and obtain the coverage itself. This will provide some security for the owner, who will not have to rely on anther party's insurance carrier for recompense in the event of loss or damage.

In addition to insurance, companies are frequently using new and innovative ways to minimize or allocate liabilities and risks. One way of minimizing risk is through the use of contract clauses whereby either or both parties to a contract agree to waive consequential damages.

Consequential damages are those damages or losses that arise not from the immediate act of the party, but in consequence of such act. Thus, for example, damage to a contractor's equipment would be direct damages, while lost profit from inability to use the equipment would be consequential damages. The terms of the contract that waive consequential damages should be clear and unambiguous to ensure their proper application.

A construction project must, of course, comply with all applicable laws and regulations, another source of risk. The standard construction and design contracts often do not resolve the issue of which party must ensure compliance with various laws and regulations such as the ADA.

Unless the contract between the owner and the designer or general contractor specifically states that the design and subsequent construction must be compliant with all applicable laws and regulations, an owner runs the real risk of having a facility completed that is not fully compliant, which could create significant additional expenditures. To alleviate this concern, the owner should make sure that its contracts with the architect/designer and general contractor contain clauses that require that the facility be designed and built in compliance with applicable laws and regulations, thereby placing the burden of compliance on those best able to ensure it.

Until recently, owners and general contractors had little cause to show interest in the day-to-day operations and hiring practices of subcontractors. One of the primary reasons for long-standing contracting procedures in the construction industry was precisely to avoid many of the headaches associated with the acquisition of labor. Until a recent case involving Wal-Mart, owners and general contractors rarely dealt with government requirements to properly document workers and ensure that workers are legally eligible to work.

In late 2003, however, INS officials raided Wal-Mart stores and approximately 300 undocumented workers were arrested. The subcontracted workers were not employees of Wal-Mart, but rather were employed by independent contractors who had janitorial service contracts with various Wal-Mart stores. Despite this fact, Wal-Mart now faces a possible criminal probe regarding the hiring practices of the independent contractors, and many of the allegedly undocumented workers have filed civil actions against Wal-Mart.

So, how should an owner deal with documentation issues regarding the employees hired by independent contractors, for example, where a general contractor hires a subcontractor to complete portions of a construction job?  There are numerous pitfalls surrounding an owner's decision on how to deal with this issue. If the owner becomes too intimately involved in the process of documenting workers, it risks inadvertently taking on full responsibility and the concomitant liability for those workers. However, if the owner avoids the issue by sticking its proverbial head in the sand, it risks liability for “willful blindness”; that is turning a blind eye to facts that were readily apparent and that should have alerted the owner to the problem.

Perhaps the best, and probably safest, way to deal with these issues is to include a clause in all contracts that the general contractor and each subcontractor is responsible for ensuring that all of its employees are hired and employed in full compliance with all INS and other employment regulations by local, state and federal authorities. Such a clause should specifically state that although the owner is not involved in or responsible for documenting workers, it is a condition of the contract that all contractors and other parties are expected to comply with all regulatory requirements.

Mapping out the best response to this changing landscape may have to wait for the outcome of the ongoing investigations and civil actions for certainty, but the course described above may provide more protection than the status quo.

The issues discussed here are by no means exhaustive, but rather provide an overview of some of the issues that should be considered when drafting construction contracts. Including properly drafted language intended to minimize risks and forestall costly litigation at the outset can significantly reduce ancillary costs associated with contract disputes.

William D. Jones III and Max A. Moseley are attorneys with Johnston Barton Proctor & Powell LLP, Birmingham, Ala. They may be contacted at wjones@jbpp.com and mmoseley@jbpp.com or by calling (205) 458-9400. The firm's practice includes assisting corporate clients in achieving their expansion and relocation goals. The firm's Web address is www.jbpp.com.