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Construction Disputes: What, When and How Much?

By: Wesley D. Hurst

Los Angeles, CA

Construction disputes can arise before, during and after construction over a variety of issues involving a range of parties. Owners, architects, engineers, lenders, contractors and subcontractors may find themselves embroiled in a range of contentious issues such as scope of work, construction defects, delays in performance, and payment issues.

Despite the wide variety of issues and parties, most construction disputes can be simplified into three categories: (1) What did the parties intend to be built, (2) When did the parties contemplate the project would be built, and (3) How much did the parties contemplate the project would cost. This general approach applies to projects ranging from routine remodels of single family homes to new construction of industrial projects costing hundreds of millions of dollars. The following overview addresses the what, when and how much of some common construction disputes.

What

Extra Work: During construction, a contractor may claim that certain work is not within the scope of the contract and request that the owner agree to a change order, often at an increased cost. The owner may disagree, arguing that the claimed change was within the scope of the contractors obligations. Assessment of these claims requires a careful review of the construction contract, which in most instances will incorporate the project plans and specifications.

Defective Construction: Generally, construction defects are conditions that do not comply with the contract, the plans and specifications, applicable building codes or industry standard. Disputes often arise as to whether a particular condition, in fact, is a defect. Assuming a defect has been established, the parties may dispute the value of associated damages.

Typically, owners will argue for the cost to repair or correct the condition. Occasionally, the cost of correcting the work is quite substantial relative to the cost of the project, so the contractor will argue that the correct measure is the diminished value of the project; ie: what is the project worth in its existing condition as compared to a project without the particular defect. For residential projects, the measure is the lesser of these two calculations.

When

Delays: Delays can be caused by bad weather, material procurement, building inspectors, change orders requested by the owner or unclear plans or specifications provided by the project architect or engineer. Analyzing delay claims starts with who was responsible for causing the delay and who bore the risk for that delay under the contract documents.

A delay claim by an owner will typically include a claim for damages for delayed occupancy or use of the project. These damages are sometimes difficult to prove, but can include loss of rent, increased cost of financing, lost profits or, in the case of residential owners, increased cost of housing.

Alternatively, a contractor pursuing a delay claim may assert damages for increased insurance costs, additional on-site expenses, escalating material prices, increased salaries for job site superintendents, increased equipment costs and additional office overhead expenses (eichleay damages).

Contract Provisions Regarding Delay: A contract may include a provision requiring a contractor to pay a penalty for each day a project is late. The concept of a penalty, which Courts are reluctant to enforce, is in contrast to a liquidated damages provision, which attempts to calculate, in advance, a fair and reasonable estimate of actual damages from a delay and are generally enforceable under the California Civil Code. Disputes can arise over whether a provision labeled a liquidated damages clause is really a penalty.

An owner may request a no damages for delay term which places the monetary risk of a delay on the contractor. Generally, these provisions are interpreted narrowly.

How Much

Type of Contract: There are different types of cost provisions in construction contracts. Two common types are lump sum (fixed price) and cost plus contracts, both of which have many variations. A fixed price contract is based on certain assumptions which may include specific pricing for various components of the project, such as the type and number of windows. Changes to those assumptions will change the fixed price and can be the source of disputes. A cost plus contract typically requires the owner to pay the actual cost of the work plus a pre-determined fee for the contractor (either a percentage of the cost or a specific amount). These types of agreements occasionally include a guaranteed maximum price (a GMAX). Disputes can arise in GMAX contracts when changes that are either at the direction of the owner or due to errors by the contractor result in costs above the guaranteed price.

Risk of Double Payments: Sometimes, even though an owner pays the contractor, the contractor does not pay a subcontractor. provided that the subcontractor complies with very strict procedures, the subcontractor may be able to record and potentially enforce a lien on the project. To avoid the risk of a foreclosure, the owner may need to pay the subcontractor and then pursue the contractor for the double payment. New legislation in California effective in 2011 will change the procedures so that an owner will have more notice before a lien is recorded and thus an opportunity to ask the contractor about any payment issues with subcontractors.

The situations described above, as well as a host of other issues, such as contractor licensing, insurance and bonding issues, can cause construction disputes. However, a well-written construction contract that defines what is to be built, when it is to be built and how much the project will cost can minimize the risk of disputes among the multiple parties involved.

Wes is an experienced litigation attorney with a highly successful record in all aspects of business litigation, construction and real estate disputes, and class action defense. He also has extensive experience advising clients with insurance coverage issues (whurst@rutterhobbs.com).

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