Handling Construction Disputes

By Scott I. Zucker

It appears inevitable, whether it's over the scope, quality, timing or payment for the work, that disputes will arise between owners and their contractors during construction projects. Eliminating these conflicts, or even reducing their magnitude, can save project owners not only money, but the time and stress involved in having to deal with such problems. The best way to avoid or reduce construction disputes is to address as many of the questions concerning the project up front and incorporate the answers to those questions into the construction contract. If the terms of the contract are mutually agreed upon before the work begins, the owner should be in a better position to handle any disputes that may arise once the project proceeds.

Drafting the Contract

1. Scope of Work

A common issue between owners and contractors is whether certain work performed by the contractor is in the original contract or is an "extra" to the agreement. As an extra, the owner would be obligated to pay more than the agreed contract price for the work to be performed. Therefore, it is vitally important that the scope of the work, as described in the specifications and drawings prepared by the architect and incorporated by reference into the contract, be clearly spelled out to avoid any ambiguity concerning what is to be included in the contractor's work.

2. Time

The schedule for performance is additionally crucial for avoiding any disputes between the owner and the contractor as to when the project is expected to start and finish. The owner must be able to rely on the schedule in order to obtain its financing, hire its employees and begin marketing the facility to rent its units. Unless both parties are clear as to what the schedule is for the project, the contractor will have too much flexibility in performing its work and would have no liability for completing the project late.

3. Payments

Another large area of conflict between owners and contractors is when the contractor should be paid for its work. A method, therefore, needs to be included in the agreement to determine the contractor's entitlement for payment. A common practice is to use progress payments. Under this process, the contractor submits its invoice to the owner based upon the percentage of work performed to date, and the owner or architect then inspects the work to determine that it has, in fact, been performed. Once the inspection is complete, the percentage of the contract value matching the percentage of the work performed will be paid. The owner will then retain 10 percent of that payment from the contractor as "retainage" until the project is completed. Final payment, which normally includes money from the accumulated retainage, would occur only when certain final conditions have been met under the contract. These conditions include the completion of all punchlist items, approval of the work by the architect, and the delivery of all lien releases and warranties to the owner. These lien releases insure that all of the subcontractors and suppliers have been paid by the general contractor for their work on the project.

4. Changes

There also needs to be a procedure in place for handling changes in the work. Without one, the owner and contractor can find themselves at the end of the project arguing over whether the contractor should be paid for its additional work. The construction contract must therefore state specifically how changes are to be agreed upon. It is recommended that all changes in the work be put in writing and the amount to be paid for the work be agreed upon before it is performed.

5. Termination

The construction contract should also include a provision whereby the owner can terminate the contractor if it fails to adequately perform its work, fails to pay its subcontractors and suppliers, disregards laws or ordinances or files bankruptcy. Terminating a contractor should be an owner's last resort, due to the fact that it will ultimately cost an owner more money to hire a follow-on contractor to finish the work. If an owner does terminate its original contractor, the owner should then make every effort to put in place another strong agreement with its follow-on contractor setting forth the same issues regarding the scope of work, schedule and payment.

Certainly, these are not all of the contract provisions that need to be considered when drafting a construction contract. An owner and the contractor must consider provisions such as indemnification, insurance, bonding, warranties, safety precautions, cleanup obligations, responsibility for temporary facilities, and the amount of liquidated damages for delay. All of these issues should be discussed so as to hopefully avoid any disputes once the project begins.

Attempting to Reach Solutions

If a situation arises (for example, work found to be defective) the owner and contractor should meet to discuss the problem and seek to reach an immediate resolution. Often times, this may be nothing more than the contractor's agreeing to fix its work. Yet, if the contractor is slow to respond to the problems, the owner can then rely on the contract to determine its next step. In this particular example, the terms of the contract that address approval of the work would be used to guide the parties. The construction contract would likely contain a provision that after notice of the defect by the owner, the contractor has only a short period of time to cure, or fix, the defect. If the contractor still fails to respond after notice, the owner is then entitled to have the problem fixed and can credit the cost of the repair against any money owed to the contractor. Unfortunately, sometimes problems cannot be solved simply through discussion. (For example, the contractor may claim that the problem is due to a bad design, not a workmanship failure). Therefore, it will be necessary to take the matter to the next level.

Commonly, at the next level of a construction dispute, it is helpful to bring in an architect or an engineer to act as an arbitrator between the parties. The architect or engineer can be asked to render a decision based upon his interpretation of the contract and the plans for the project. Even if the dispute goes to this "next level," the owner and the contractor should still be in the mindset of resolving their disputes amicably. If the disagreement expands past this point, it may require the parties to make a "business decision" about whether they want to continue fighting due to the time expense involved. Often times, it will cost more money to fight over a disputed issue than to mutually agree to share the costs to fix the problem.

Seeking Legal Action

If the terms of the contract or interpretation by an architect or engineer do not assist an owner and contractor in resolving their disputes, the conflict might rise to the level of legal action. Certainly, if the contractor defaults or performs defective work and the parties cannot amicably reach a resolution, the owner may have no choice but to file a complaint against the contractor for its breach of contract. A breach of contract complaint is simply a claim that the contractor has failed to perform pursuant to the terms and conditions of the contract. The lawsuit requests that the owner recover the money necessary to complete the construction of the project and repair the contractor's defects. The law allows other causes of action to be brought against a contractor and may include a breach of warranty claim or a claim for negligent construction if the contractor's actions have lead to personal injury or damage to other parts of the owner's property.

Not all construction disputes can be avoided through the use of good contracts. However, many of the smaller problems that ultimately mushroom into larger ones can often be avoided with the use of a strong contract and the ability of the parties involved to focus on seeking solutions rather than lawsuits.

Scott I. Zucker is a partner in the law firm of Shapiro Fussell Wedge Smotherman & Martin, based in Atlanta. He is an expert in the field of self-storage law and represents self-storage owners and managers throughout the country in matters that include contracting for construction, preparing lease agreements, defending tenant claims and handling employment disputes. Mr. Zucker also provides, on a consulting basis, advice to self-storage companies on operational safeguards in the areas of foreclosure proceedings, premises liability and hazardous-waste controls. Mr. Zucker can be reached at (404) 870-2232 or via e-mail at [email protected].