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Construction Law: An Introduction for engineers, Architects, and Contractors
5
Copyright
6
Contents
9
Preface
21
1: Law and Government
25
1.1: Introduction
25
1.1.1: The Powers of Governments
25
1.1.2: City and County Governments
26
1.1.3: The Powers of the Federal Government
26
1.2: The Sources and Hierarchy of Law
27
1.2.1: The Constitution
27
1.2.2: Statutes and Ordinances
27
1.2.3: Agency Regulations
28
1.2.4: International Treaties
28
1.2.5: Appellate Court Opinions
28
1.3: The American Judicial System
28
1.3.1: Structure of the Court Systems
29
1.3.2: Federal Trial and Appeals Courts
29
1.3.3: State Trial and Appeals Courts
30
1.4: Common Law
30
1.4.1: Stare Decisis
31
1.4.2: Restatements of the Law
31
1.5: Legal Codes
32
1.5.1: Uniform Codes
32
1.5.2: The Uniform Commercial Code
33
1.6: Legal Doctrines
33
1.7: Choice-of-Law Clauses
34
1.8: Criminal Law versus Civil Law
35
1.9: Cause of Action
35
1.10: Summary Judgment
36
2: Basic Legal Principles
39
2.1: Legal Issues in Construction
39
2.2: Principles of Contract Law
39
2.2.1: Unilateral Contracts versus Bilateral Contracts
40
2.2.2: Oral Contracts
40
2.2.3: Third-Party Beneficiaries
41
2.2.4: Contract Interpretation
41
2.3: Principles of Agency Law
45
2.3.1: Apparent Authority
45
2.3.2: The Principal's Liability for the Agent's Acts
46
2.3.3: Ratification
46
2.4: Principles of Tort Law
47
2.4.1: Intentional Torts
47
2.4.2: Unintentional Torts (Negligence)
47
2.4.3: Strict Liability
51
2.4.4: Misrepresentation
52
3: Project Participants
53
3.1: The Owner
53
3.1.1: Access to the Building Site
54
3.1.2: Restrictions on Use of the Property
55
3.2: The Design Professional Team
55
3.2.1: Site Evaluation Consultants
56
3.2.2: The Geotechnical Consultant
57
3.3: The Construction Team
57
3.3.1: Subcontractors and Suppliers
58
3.4: Construction Lenders
58
3.4.1: Collateral Assignment to Lender
59
3.4.2: Other Lender Requirements
59
3.4.3: Construction Loans
60
3.4.4: Bond Financing
61
4: Project Delivery Systems
63
4.1: Design-Bid-Build
63
4.2: Multiple Primes
65
4.3: Construction Management
65
4.3.1: Agency Construction Management
66
4.3.2: Construction Management At-Risk (CMAR)
66
4.4: Design-Build
67
4.4.1: Design-Build Proposals
68
4.4.2: Advantages and Disadvantages of Design-Build
69
4.4.3: Bridging Consultants
70
4.5: Engineer-Procure-Construct (EPC)
70
4.6: Turnkey Construction
71
4.7: Integrated Project Delivery (IPD)
71
4.8: Fast-Track Construction
71
4.9: Public-Private Partnerships
72
4.9.1: History of Public-Private Partnerships
73
4.9.2: Constraints on Public-Private Partnerships
73
5: Construction Contracts
75
5.1: The Construction Contract
75
5.1.1: Prebid Conferences
75
5.1.2: Right to Reject Bids
76
5.2: The Contract Documents (Owner-Contractor)
76
5.2.1: The Contractor's Bid
77
5.3: Conflicts between the Documents
78
5.4: Errors in the Documents
78
5.4.1: Latent Discrepancies
79
5.5: Specific over General; Written over Printed
80
5.6: Interpretation against Drafter
80
5.7: Specifications
81
5.8: Description of the Work under a Construction Contract
81
5.9: Third-Party Beneficiaries
82
5.10: Industry Standard Forms versus Custom Forms
82
5.10.1: Drafting Custom Forms
83
5.10.2: AIA Contract Documents
84
5.10.3: Engineers Joint Contract Documents Committee (EJCDC)
86
5.10.4: ConsensusDOCS
87
5.10.5: Comparing the AIA, EJCDC, and ConsensusDOCS Documents
88
5.10.6: AGC Forms
89
5.10.7: Other Industry Standard Forms
89
5.11: Commencement of Work Prior to Contract
89
5.11.1: Letters of Intent
90
6: The Design Process
91
6.1: Design Responsibilities
91
6.1.1: Contractor's Responsibility for Design
91
6.1.2: Value Engineering
92
6.2: The Owner's Program
92
6.3: The Design Agreement (Owner-A/E)
92
6.3.1: Schematic Design Phase
93
6.3.2: Design Development Phase
93
6.3.3: Construction Documents Phase
93
6.3.4: Bidding or Negotiation Phase Services
94
6.3.5: Construction Phase Services
94
6.3.6: Basic Services versus Additional Services
95
6.3.7: The A/E's Compensation
95
6.4: Standard of Care Applicable to Design Services
95
6.4.1: Contractual Standard of Care
96
6.4.2: Proving Violation of the Standard of Care
97
6.4.3: Implied Warranties
97
6.4.4: Designing to the Owner's Budget
98
6.4.5: The A/E's Liability for its Estimate
98
6.5: Ownership of the Design Documents
99
6.5.1: Use of the Plans and Specifications
99
6.6: Termination of the Design Agreement
100
7: The Procurement Process
101
7.1: Selection of Contractors for Public Projects
101
7.1.1: The Bid Package
102
7.1.2: Duty to Award to the Lowest Bidder
102
7.1.3: Bid Responsiveness
102
7.1.4: Responsible Bidder
103
7.1.5: Bid Protests
104
7.1.6: Bid Security
105
7.1.7: "Best Value" Awards
105
7.2: Selection of Design Professionals
106
7.3: Alternatives to Design-Bid-Build in the Public Sector
107
7.3.1: Design-Build Construction in the Public Sector
107
7.4: The Federal Acquisition Regulation (FAR)
108
7.5: Procurement on Private Projects
109
8: Pricing Construction Projects
111
8.1: Fixed-Price Contracts
111
8.1.1: Fundamental Characteristic of a Fixed-Price Contract
111
8.1.2: Allowances
112
8.1.3: Material Price Escalation Clauses
112
8.1.4: Index Pricing
113
8.2: Cost-Plus Contracts
113
8.2.1: Labor
114
8.2.2: Subcontracted Work
114
8.2.3: Heavy Equipment
115
8.2.4: Small Tool Allowance
115
8.2.5: Reasonableness or Necessity of Costs Incurred
115
8.2.6: Contractor's Overhead and Profit
116
8.2.7: Estimates and Cost-Plus Contracts
116
8.2.8: Timely Payment Discounts
117
8.2.9: Audit Rights
117
8.3: Cost-Plus with Guaranteed Maximum Price
117
8.4: Unit-Price Contracts
118
8.4.1: Variation in Estimated Quantities (VEQ) Clauses
118
8.5: Unbalanced Bidding
119
8.6: Bidding When the Design Is Incomplete
120
9: Subcontractors and Suppliers
121
9.1: Subcontractors versus Suppliers
121
9.2: Owner's Control over Subcontractor Selection
122
9.3: Subcontractor Bids
122
9.3.1: Enforcing a Subcontractor's Bid
123
9.3.2: The Subcontractor's Right to Enforce Its Bid
124
9.4: Incorporation by Reference
124
9.5: Flow-down and Flow-up Provisions
125
9.5.1: Rights and Liabilities of the Parties under Flow-down Provisions
125
9.6: Duty to Cooperate and Coordinate Subcontract Work
126
9.6.1: Limiting the Liability for Coordination
126
9.6.2: Coordination of Multiple Primes
127
9.7: Subcontractor Payment
127
9.7.1: "Pay-If-Paid" versus "Pay-When-Paid"
128
9.8: Subcontractor Claims against the Owner
129
9.8.1: The Pass-through System
130
9.8.2: Liquidating Agreements
130
9.9: Conditional Assignment of the Subcontracts to the Owner
131
9.10: Minority and Disadvantaged Business Programs
132
9.10.1: Federal Minority and Disadvantaged Business Programs
133
9.10.2: Agency DBE Programs
135
10: Time for Performance
137
10.1: Time Is of the Essence
137
10.1.1: Time-Is-of-the-Essence Clauses in Construction Contracts
138
10.2: Date of Commencement/Time for Completion
138
10.2.1: Delays in Commencement of the Work
139
10.2.2: Waiver of Time for Completion
139
10.3: Substantial Completion
140
10.3.1: The Significance of Substantial Completion
140
10.3.2: Establishing Substantial Completion
141
10.4: Final Completion/Final Payment
141
10.4.1: Acceptance of Defective Work
142
10.5: Delays
143
10.5.1: Determining Whether a Delay Was within a Party's Control
144
10.5.2: Delays Due to Weather
145
10.5.3: Concurrent Delays
146
10.6: Liquidated Damages
146
10.7: Constructive Acceleration
148
10.8: Right to Finish Early
148
10.9: Milestones
149
11: Construction Scheduling
151
11.1: Bar Charts
151
11.2: Critical Path Scheduling
152
11.2.1: Activity Logic
152
11.2.2: Arrow Diagramming
152
11.2.3: Precedence Diagramming
153
11.2.4: As-Planned (Baseline) Schedule
153
11.2.5: Float
154
11.2.6: Critical Path
154
11.2.7: Multiple Calendars
155
11.3: Scheduling Specifications
155
11.4: Schedule Updates
156
11.5: Resource Leveling
156
11.6: CPM-Based Methods for Proof of Delay Claims
157
11.6.1: Total Time Analysis
157
11.6.2: Impacted As-Planned ("What-If ")
158
11.6.3: Collapsed As-Built ("But For")
158
11.6.4: As-Planned versus As-Built
158
11.6.5: Windows Analysis
159
11.7: Expert Witness Testimony
159
11.8: Using CPM to Estimate Extensions of Time
160
11.9: Using Bar Charts to Prove Delay Claims
161
12: Contract Administration
163
12.1: The A/E's Role in Contract Administration
163
12.2: A/E's Liability for Contract Administration
164
12.2.1: Approval of Shop Drawings and Other Submittals
164
12.2.2: Site Visits and Inspections
165
12.2.3: AIA B101 Provisions
166
12.2.4: The Right to Stop Work
166
12.2.5: Approval of Progress Payments
167
12.2.6: Responding to Change Order Requests
168
12.2.7: Requests for Information, Interpretations, and Clarifications
168
12.3: A/E's Role in Contractor Termination
168
12.4: Initial Decision Maker (IDM)
169
13: The Payment Process
171
13.1: Progress Payments
171
13.1.1: Schedule of Values
171
13.1.2: The Application for Payment
172
13.1.3: Certification of Payment
172
13.2: Retainage
173
13.2.1: Payment of Subcontractor's Retainage
174
13.2.2: Claims on Retainage
174
13.3: Accord and Satisfaction
174
13.3.1: Payment of an Accord by Check
175
13.4: Joint Checks
176
13.4.1: Joint Payee versus Alternative Payee
176
13.5: Title Insurance
176
13.6: Obligations of the Lender
177
13.7: Evidence of Financing
177
13.8: Prompt Payment Acts
178
13.8.1: The Progress Payment Request
178
13.8.2: Payment on Subcontracts
178
13.9: The Owner's Payment Obligation on Private Construction
179
13.10: The False Claims Act
179
13.10.1: Liability for False Claims
180
13.10.2: Prosecution of False Claims
180
13.10.3: State False Claims Act
181
14: Changes to the Work
183
14.1: Contract Changes
183
14.1.1: Construction Change Directives
184
14.2: Pricing Change Orders
184
14.2.1: Determination of Price by a Third Party
185
14.2.2: Schedule Adjustments
185
14.3: Constructive Changes
185
14.3.1: Owner's Direction or Improper Rejection of Work
186
14.3.2: Notice Requirements for a Constructive Change
186
14.3.3: Waiver of Notice Requirement
187
14.3.4: Extra Work versus Additional Work
187
14.4: Federal Government Contracts
187
14.4.1: Equitable Adjustments
188
14.4.2: Escrow of Bid Documents
188
14.5: Authority to Issue Changes
189
14.5.1: Apparent Authority and Ratification
189
14.6: Duty to Perform the Changed Work
190
14.7: Reservation of Rights
190
14.8: Changes Clauses in Subcontracts
192
14.9: Documentation of Costs
192
14.10: Cardinal Changes
193
14.10.1: The Contractor's Options
193
15: Differing Site Conditions
195
15.1: The Purpose of the Differing Site Conditions Clause
195
15.2: Differing Site Conditions Claims
196
15.2.1: Type I—Conditions Materially Different Than Indicated
196
15.2.2: Type II—Conditions of an Unusual Nature
197
15.3: Limitations on Claims for Differing Site Conditions
198
15.3.1: Duty to Make a Site Inspection/Duty to Investigate
199
15.3.2: Disclaimers
199
15.3.3: Notice
201
15.3.4: Waiver of Claims
201
15.4: Variations in Estimated Quantities Clause
201
15.5: Geotechnical Baseline Summary Report
202
15.6: Hazardous Materials
202
15.7: Tort and Breach-of-Contract Actions
202
15.7.1: Misrepresentation (Intentional or Negligent)
203
15.7.2: Owner's Breach of Implied Warranty of Plans and Specs
203
15.7.3: Failure to Disclose Superior Knowledge
203
15.7.4: Mutual Mistake
204
16: Termination of the Construction Contract
205
16.1: Unilateral Termination
205
16.2: Contractual Termination Provisions
206
16.3: Termination by the Contractor for Cause
206
16.4: Termination by the Owner for Cause
207
16.4.1: Notice and Opportunity to Cure
207
16.5: Wrongful Termination
208
16.6: The Role of the Performance Bond Surety
209
16.7: Termination for Convenience
210
17: Mechanic's Liens
211
17.1: Purpose of a Mechanic's Lien
211
17.2: Procedures for Filing a Lien
212
17.3: Lien Entitlement
212
17.3.1: Liens for Services
213
17.3.2: Liens for Materials
213
17.4: Enforcement of the Lien
214
17.4.1: Priorities
214
17.4.2: Bonding Off
215
17.5: Interests Subject to a Lien
215
17.5.1: Subcontractor and Supplier Claims
216
17.5.2: Amount of the Lien
216
17.6: Lien Waivers
217
17.6.1: No-Lien Contracts
218
17.7: Rights of Owners and Third Parties
218
17.8: The Effect of Bankruptcy on a Mechanic's Lien
218
17.9: Trust Fund Statutes
219
17.10: Stop Notices
219
17.11: Liens on Public Property
219
18: Construction Insurance
221
18.1: Types of Insurance
221
18.2: Commercial General Liability
222
18.2.1: Bodily Injury and Property Damage
222
18.2.2: Exclusions to Coverage
223
18.2.3: Additional Insured Status
224
18.3: Builder's Risk Insurance
224
18.4: Workers' Compensation Insurance
225
18.5: Professional Liability Insurance
225
18.6: Wrap-up Insurance Programs
226
18.7: Waiver of Subrogation
226
19: Surety Bonds
229
19.1: Use of Surety Bonds in the Construction Industry
229
19.1.1: Bid Guarantees
230
19.1.2: Payment Bonds
230
19.1.3: Performance Bonds
232
19.2: Rights and Remedies of Sureties
232
19.2.1: Indemnity Agreements
233
19.2.2: Discharge of the Surety's Obligations
233
19.3: Bonding Requirements
234
20: Liability for Defective Construction
235
20.1: Determining Liability
235
20.2: Owner Claims against the Contractor
236
20.2.1: Warranties
236
20.2.2: Notice Requirements
237
20.2.3: Tort Claims
237
20.3: The Spearin Doctrine
238
20.3.1: Application of the Spearin Doctrine
238
20.3.2: Limitations on Spearin
239
20.4: The A/E's Liability for Defective Construction
240
20.5: Affirmative Defenses
241
20.5.1: Statutes of Limitation
241
20.5.2: Statutes of Repose
242
21: Calculations of Damages
245
21.1: Compensatory Damages
245
21.1.1: Consequential Damages
246
21.2: Punitive Damages
246
21.3: Duty to Mitigate Damages
247
21.4: Owner's Damages
247
21.4.1: Owner's Damages for Late Completion
247
21.4.2: Economic Waste
249
21.4.3: Betterment
249
21.5: Contractor's Damages
250
21.5.1: Equipment Costs
250
21.5.2: Home Office Overhead
251
21.5.3: Cost Increases for Labor and Materials
252
21.5.4: Methods of Estimating Loss of Productivity
252
21.6: Limitation of Liability
254
21.6.1: Exculpatory Clauses
254
21.6.2: Indemnification Agreements
255
21.6.3: Limitation-of-Liability Clauses
256
21.6.4: Waiver of Consequential Damages
257
21.7: Specific Performance
258
21.8: Tort Claims
258
21.9: Recovery of Damages in the Absence of an Express Contract
259
21.9.1: Reliance Interest—Promissory Estoppel
259
21.9.2: Implied-in-Fact Contracts—Quantum Meruit
260
21.9.3: Restitution Interest—Unjust Enrichment
260
21.9.4: Quantum Meruit versus Unjust Enrichment
261
22: The Economic Loss Doctrine
263
22.1: Tort versus Contract Law
263
22.1.1: Definition of Economic Loss
264
22.1.2: Development of the Economic Loss Doctrine
264
22.1.3: Basis for the Doctrine
265
22.1.4: Public Policy Considerations
265
22.1.5: Strict Application of the Doctrine
266
22.1.6: Exceptions to the Economic Loss Doctrine
266
22.2: Claims of Defective Construction Products
267
22.2.1: Damage to Other Property
268
22.3: Claims of Defective Construction Services
268
22.3.1: Claims of Defective Design Professional Services
269
22.4: Potentially Dangerous Products (Risk of Harm Exception)
270
22.5: Negligent Misrepresentation
271
22.5.1: Negligent Misrepresentation Claimants
271
22.5.2: Tort versus Contract Claims for Negligent Misrepresentation
272
23: Alternative Dispute Resolution
273
23.1: Arbitration
273
23.1.1: Arbitration Clauses
274
23.1.2: Arbitration Statutes
274
23.1.3: Arbitration Organization Rules
275
23.1.4: Prehearing Activities
275
23.1.5: Selection of Arbitrators
276
23.1.6: The Arbitration Hearing
276
23.1.7: The Award
276
23.1.8: Appealing the Award
277
23.1.9: Costs of Arbitration
278
23.1.10: Typical Schedule for Arbitration
278
23.1.11: Joinder and Consolidation
278
23.1.12: Waiver of Arbitration Rights
279
23.1.13: Effect of Arbitration on the Surety
280
23.2: Litigation versus Arbitration
280
23.3: Mediation
281
23.4: Other Types of Alternative Dispute Resolution
282
23.4.1: Med/Arb
282
23.4.2: Mini-Trial and Summary Proceedings
282
23.4.3: Dispute Resolution Boards
283
23.4.4: Standing Neutrals
284
23.5: Dispute Prevention
284
Appendix A: List of Abbreviations
285
Appendix B: Table of Cases
289
Appendix C: Understanding Case Citations
291
Glossary
295
Index
303
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