It was during one of those interminable construction site meetings that a comment was made that caused this writer to pause then agree. The architect and the general contractor were arguing as usual about the typical question of whether cost saving techniques proposed by the architect would actually save money or cause chaos and their dispute deteriorated into mutual recriminations then mutual protestations that each had the hardest task in the construction project and no one else on the project understood how hard their particular task was.
The Owner, who was suffering through his first real construction project broke in. “You guys have it easy. Each of you has a job that’s tough. I have the job of supervising the big picture and getting the money…plus I have to handle you guys as well.”
He was right.
Risk allocation is a fundamental consideration in all contracts. Usually, parties to construction contracts will seek to include provisions that limit and distribute their respective risks, duties, responsibilities and liabilities. Such provisions can be unreasonable in their attempts to shift responsibilities from one party to another, and should, therefore, be scrutinized very closely during contract formation and negotiation. Even where express contract provisions are provided, the law generally imposes implied warranties, duties, and responsibilities on the parties. See the other articles on this web site on Construction Law and Litigation.
The person “in charge” of the overall project is usually termed the “Owner” and is often the only nonprofessional in the entire project. It is critical for each Owner, until he or she has built numerous projects, to understand that they are operating under a significant handicap. Not only must they contend with professionals who do these types of projects (and create form contracts) for a living, but the various builders and suppliers have finite tasks while the Owner must assume financial responsibility for the success of the entire project.
Owner duties and responsibilities that have arisen in typical disputes include:
1. Providing financing for the project.
2. Providing site surveys.
3. Securing and paying for easements.
4. Warranting the plans and specifications.
5. Warranting owner furnished materials.
6. Disclosing superior knowledge.
7. Acting on clarifications and changes.
8. Interpreting the documents.
9. Cooperating with the contractor.
10. Selecting all professionals on the project.
11. Interacting with various governmental bodies.
12. Interacting with real estate professionals to sell the finished project.
13. Interacting with title companies to facilitate the sales.
This article shall briefly discuss the typical duties imposed on the Owner as described above. Each project will have its unique requirements: this article discusses obligations typical in most projects.
TYPICAL OWNER OBLIGATIONS
1. Financing the work
It’s the money, honey.
Above all, the Owner must assure adequate funding for the project to be paid in a timely manner. And part of that task is to arrange reserve funding for the inevitable problems that arise in any job.
Some would list this as the owner's first responsibility to the contractor, and it is probably the primary area of disputes between owner and contractor. In the case of a public bid, if the funding source had not been properly secured, it is at best unfair to those contractors who had taken the time and expended the energy (and money) to bid the project. Once the project is underway, one of the owner's primary responsibilities, as far as the contractor is concerned, is to secure funds to allow payments as prescribed in the contract. Related issues include:
(a) The timing of payables
Payments to the contractor are typically made after receipt of each invoice within the time period specified, or within the requirements of appropriate legal statutes. The contract language itself often determines which takes precedence. If the contractor has met the necessary requirements, the owner can become responsible for subsequent delay and possibly consequential damages, such as interest charges.
Most cases involve disputes over owner partial payments, late payment or non-payments to contractors and/or designers. After all, when all is said and done, isn’t construction about money?
(b) Rates and amounts corresponding to the actual job progress
If materials can be substantiated to be properly stored on the site and/or installed in-place in an acceptable manner considering all project requirements, the owner will typically pay for those materials. An alteration of the process by the owner for convenience may create a hardship on the general and subcontractors which may entitle them to compensation. On the other hand, contract abandonment and termination cases often involve disputes over the reconciliation between the aggregate amount of material delivered, installed and paid-for, and the aggregate uninstalled amount of material remaining on-site. Have you ever heard someone say that “material walked-off the site”?
Equally typical disputes are installation that is defective and must be removed; installation that interferes with later equally vital installation; installation done out of order; or installation that is not complete. All these areas must be resolved or payment disputes are inevitable. Remember, the financing institution normally pays predicated on amount of completion and the owner may find that the financial institution refuses to release funds due to disputes as to amount of completion.
(c) Contingency for changes
Change orders are a normal part of the construction process. As such, the owner has an obligation to anticipate their occurrence. Public project funding will incorporate some additional percentage (often 5% to 7%) of the project bid amount to be budgeted to fund legitimate changes as they occur. Responsibility for the delay in the owner’s response to proper contract changes that results from lack of, or late availability of, funds will often rest with the owner. Change orders occupy the single greatest source of litigation/arbitration in construction projects in the United States. The owner must both master the procedure for handling change orders, and keep accurate and complete reconciliations of how much they are costing and if funds are available to handle them.
2. Providing site surveys
It is the owner's responsibility to provide complete and accurate relevant data, as may become necessary for correct installation of the work. The contractor is typically responsible for the correct layout and execution of the work.
(a) Establishment of property lines
The most basic information provided by the owner includes the project property lines, or at least the contract limit lines within which the contractor has the right to operate. We have worked on a number of disputes involving damages issues resulting from inaccurate existing data or the improper layout of property lines.
(b) Site material composition
If excavation is required, geo-technical data describing the soil composition that will have to be dealt with is a fundamental prerequisite. The interesting corollary here is that the boring and soils information should be given in locations properly relevant to the construction. If, as arose in a recent case, the boring information around the perimeter of a foundation indicates dry gravel, with a low water table, and no information regarding the soils characteristics is given within the foundation area, the contractor may assume dry gravel with no water in the way of the excavation exists throughout the entire foundation construction. When either rock or soup is subsequently encountered while excavating the interior portions of the foundation (where no specific information had been given), the contractor may be entitled to additional compensation.
(c) Baselines and benchmarks
The contractor is most often responsible for the layout of the work from baselines furnished by the owner. These data should be physically located on the site, and the owner assumes responsibility for and/or warrants its correctness. If, as occurred in a recent case, the project is then correctly laid out by the contractor relative to the baselines and benchmark, errors in the project layout transmitted from incorrect baseline or benchmark information would typically fall to the owner's account. (Here, the architect may be at fault and may face liability from the owner. Nevertheless, the owner can expect to face liability to the contractor for providing such incorrect information.)
(d) Utility locations
The owner is typically responsible for providing accurate locations of all existing utilities. Locations of telephone lines may be necessary to tie-in new building services or may be necessary to prevent accidental interruption. Correct sanitary and storm line locations and elevations are critical to the design of underground drainage systems and tie- ins. Invert elevations are also necessary to allow proper estimates of the amount of excavation and backfill for the respective lines. If, as a rose in a recent case, the invert elevation indicated on the drawings as 43.0 ft. is actually 38.0 ft., the additional 5 ft. of excavation depth may require shoring or greater trench width - all at increased cost to the contractor. If this is due to an improper representation on the drawings of the subject utility location, the owner will often pay for the increased costs.
(e) Effects of adjacent properties
The relationship of adjacent properties may be significant to the construction on the site. An important piece of information that may not be disclosed in the contract documents and may not be readily apparent in a pre-bid site investigation by the contractor, for instance, are the drainage characteristics of a surrounding property. If, as arose in a recent case, surface water from several acres of land drains into a swale that creates an active watercourse through the site that lasts several days each time it rains, the responsibility for resulting downtime, additional drainage requirements, and rework of the affected areas will likely rest with the owner.
3. Securing and paying for easements
(a) Site access
The contractor typically expects to have access to the site, even if such access is limited or restricted, as may be the case when working within a military complex, a security area of a manufacturing facility, or some similar environment, and the particulars should be made known to the contractor prior to the bid. On the other hand, the contractor should consider the potential lost time and attendant costs associated with site access. If, as arose on a recent project, these or any other types of access restrictions were not made clear prior to the commencement of the work and are not apparent in a reasonable pre-bid site investigation, the contractor will probably not be expected to carry the associated resultant additional financial burden.
(b) Agency approvals
It is often the owner's responsibility to secure all agency approvals prior to the start of work. In the absence of any noted exceptions in the contract documents, the contractor has the right to expect that such administrative matters have been taken care of. Even when the contractor is responsible for securing and paying for the building permit, as is usually the case, this responsibility amounts to a formality requiring a small amount of clerical paperwork and a payment to the jurisdiction in which the project is located. The contractor has the right to expect that, by the time the building permit is applied for, all building code requirements have been met by the design, and the permit procedure should not require any effort beyond a simple filing. If any delays in securing the building permit result from code noncompliance of the design, the owner may be responsible for the resulting costs.
4. Warranting the plans and specifications
The owner usually warrants the adequacy of the plans and specifications on many projects and, therefore, bears the responsibility for any defects or deficiencies in them. Such defects can exist in many forms, but tend to fall into the two categories: product and time. Most defective specifications problems involve the inaccuracy of the technical specifications. Time, then, most often becomes a consequential consideration related to the failure of the contract to provide the technical requirements accurately and completely. (Typical situation: in the middle of a critical early part of the project, the wrong requirements for some product results in the building inspector rejecting the work. The new product must be specially ordered which delays the project for two weeks and costs a great deal to produce. All the other trades are delayed; some go to other projects which interfere with the timely performance on the immediate project, etc, etc. A part costing only a few hundred dollars can end up costing tens of thousands in delays.)
5. Warranting owner furnished materials
Where the owner furnishes material and/ or equipment to the contractor for use in the work, there is a warranty that these items will be suitable for their intended purpose. Beyond the fundamental compatibility of materials, the owner is also responsible for the timing and coordination of the respective items in the same manner and extent as every other subcontractor and supplier. Shop drawings and other coordination information should be submitted and distributed correctly and in a timely manner, and material deliveries should be made within the requirements of the progress schedule.
6. Disclosing superior knowledge
The owner has a duty to disclose superior knowledge to the contractor that may directly or indirectly relate to the work, where that knowledge is either unknown by, or has not been made available to, the contractor. Referring back to the boring data case example, assume that the boring and soils data did in fact exist for the interior portions of the construction, but the data was intentionally left out of the contract. The hope that the contractor might absorb the cost of working through the rock (once it is finally encountered) that would have otherwise been disclosed by the proper inclusion of the relevant information may leave the owner with liability. Likewise, where the owner's superior knowledge of a factor, such as the unavailability or inadequacy of a specified material, would lead to reduced costs, improved efficiency, or simply an earlier disclosure of a problem, the owner has an obligation to so advise the contractor.
Allegations relating to whether or not the owner knew or should have known that the project could not be built in the time specified in the contract commonly refer to the owner’s “superior knowledge.” If, as arose in a recent case, one general contractor informed the owner that, in his judgment, the project could not reasonably be built in one-year, was that owner obligated to pass that contractor’s unsolicited opinion on to the other bidders? Probably. Certainly if the owner did not one could expect that issue to be hotly litigated should the project go wrong.
7. Action on clarifications and changes
Construction contracts, whether produced by and for a private owner or public agency, recognize the need and importance of timeliness with respect to issuing clarifications and reviewing change orders. This is an acknowledgment that change orders can interfere with and disrupt the orderly sequence of the work and that they should be resolved as quickly as possible to minimize their potential direct and consequential impact on construction.
The process of anticipating, identifying, pricing, negotiating and executing changes, change orders and change directives is perhaps the most prominent thread through most construction disputes. And, it is a process that exposes human frailties and faults in virtually all forms and varieties. Acts of generosity, greed, ignorance and laziness are not uncommon. Change orders account for most construction disputes. They are inevitable; they are controversial; and even if the contract provides for clear processes, most courts and arbitrators will ignore any terms that strike them as “unfair.” Above all areas in the owner’s realm of responsibility, change orders are the ones that require the most attention and care.
8. Interpretation of the documents
Although the architect normally researches and prepares recommendations for technical matters relating to design, when involving quality, cost and/or time, these corrections, changes, and interpretations are communicated to the owner who often controls the final disposition on the matter. Actual authority for some portion of the process may rest with the architect. Because no direct contractual tie exists between the architect and the contractor, however, responsibility for the architect's performance in these situations rests with the owner.
9. Cooperating with the contractor
Even when not expressed in the contract, it is generally understood that the owner has an implied duty to cooperate with the contractor to the best of his ability, and not to impede, hinder, obstruct, or interfere with the work. The same concept applies to the contractor. Although this sounds simple, its success or failure often boils down to the personalities involved. Both parties are focused on the traditional objectives of time, cost and budget, but to differing degrees and from different perspectives. A consistent theme in disputes is the disintegration of cooperation as a result of conflicts between owner and contractor over the achievement of time, cost and quality objectives.
10. Selecting all professionals on the project.
Long before there is a contractor, the owner makes what may be the most vital decisions on the typical construction project: what contractor, architect, CPA, attorney, real estate broker, engineer, bank officer, etc. to utilize. Most often, the owner selects an attorney or contractor and those people have a group of experts they often work with. More important than the job itself is the right mix of people to work on the project AND the constant supervision of the group of professionals to make sure that all tasks are being completed and that they are working well together. It must be recalled that the tools for litigation, such as Mechanics Liens and Stop Notices can delay or even destroy a project and that to avoid such disastrous tools one must have the right group of professionals, get the best advice, and make sure that long before such documents are recorded the owner has taken every step possible to remedy the situation: and that requires the best group of professionals one can find.
11. Interacting with governmental bodies
Particularly in California, zoning, land use, the various inspection agencies, neighborhood groups, etc, etc. form a complex web of often competing interests that must be addressed and dealt with. More than any other aspect of the project, these “problems” do not go away if ignored. The architect, contractor and attorney should each be assigned specific tasks for interaction but, ultimately, it is the owner who must make sure each and every agency and local group is contacted and all documents and forms filled in correctly. The delays otherwise caused can easily destroy a project.
Most contractors and architects in a local area pride themselves on being able to interact with the various agencies but all too often their relationship can actually be detrimental to the project. It is not uncommon for a past dispute between an architect and the Planning Department to have poisoned the atmosphere so much that the owner’s project is red lined by the department for special review-or revenge. The owner would do well to cross examine all the professionals to make sure no ill will exists.
12. Interacting with real estate professionals to sell the finished project.
Quite often the owners ARE real estate professionals but if not, it must be recognized that the typical project, once completed, must be rented out or sold. It is vital for the owner to begin establishing the correct relationship with the real estate people who will market and sell the finished project and to negotiate the rates of compensation. Often the developer will not wish to use real estate people to achieve sales and this question should be explored closely since rapid and professional sales efforts are normally required to make a profit on a project. Do not assume that the super heated market of California in the 90’s is typical. Most of the time the sales portion of the project can be the most difficult and interaction (and shopping for) the correct expertise in such sales if usually of critical importance.
13. Interacting with title companies to facilitate the sales.
Ultimately, the title companies will determine when escrows close and a part of the project all too often ignored is making sure title is clear and unambiguous. This is particularly important in subdivisions with large common areas or with the far more common Tenancy in Common methods of ownership used more and more in California cities. The time to engage in such planning is long before the project ends so that by the time the real estate brokerage house is given the assignment of selling the project title is either not a question or a Quite Title Action has been brought to ensure appropriate salable lots.
Conclusion
The creation of improved property can be one of the most satisfying of all occupations. One sees land developed capable of providing homes or offices for people; one can participate in the creative process and be part of those who create beautiful things that may last for generations. Consider: when you think of great cities or civilizations, more often than not it is the buildings that seize the imagination and most buildings of most great cities were built not by the government but by private owners much like here. Paris may have beautiful public buildings but it is the private apartment houses and homes that give the city its unique charm.
But to counter that creative and often profitable advantage is the need to take risk and master a entire galaxy of skills and the above list is only the beginning. Getting experienced assistance is a must for the new developer and retaining a flexible mind, keeping alert to the innumerable problems that inevitably arise…and keeping a sense of humor are all central metal preparation for this remarkable challenge.
But if one stares at the landscape and sees the tens of thousands of structures built in just the last twenty years it is clear that the challenge, while major, is by no means impossible and after the first project is completed one can create systems that often work on their own to control the project. As with most things, it is the first steps that are the hardest. And, as with most things, it is well worth while for many people to take up the challenge. No pain-no gain.