Construction Breach of Contract: The Slippery Slope of Accountability

Construction Breach of Contract: The Slippery Slope of Accountability

Construction breach of contract plagues the building and legal industries

Construction Breach of Contract is a term one hears bandied about quite frequently in the world of construction contracting and litigation. The traditional at-risk contract structure is between owner-builder, and owner and designer. When either or both parties fail to meet their contractual obligations, Construction breach of contract charges rear their ugly head.

As a party fails to meet its contractual obligations it brings increased risk and cost to its partners. In construction, there are a number of ways in which these risks are manifest – sometimes indirectly. For example, an owner may fail to provide constructable design documents to a builder. The design team may be in breach of contract with the owner, forcing a breach in contract by the owner to the contractor. Because the design team is not contracted with the builder, there is no direct breach between the designer and contractor. This is mostly the doing of the ubiquitous AIA designer-centric contract family, that is rigged to favor the designer.

Construction Breach of contract is divided into two categories:

Major (material) breach

Minor (non material breach)

Major breaches typically denote obvious and glaring examples of under-performance, such as diverting from the design plans, using substandard or material different from specifications, and failure to pay subcontractors and vendors. These are cut and dried claims.

Minor breaches can be thought of as merely less serious offenses, such as slighter, less impactful deviations from specifications. For example, using a slightly different paint color than specified might be a minor breach, whereas substituting a smaller wire gauge that is not rated for a specific amperage would be a major breach.

At the top of the list for construction breach of contract are defects in his work. Such deficiencies are guided by tolerances and quality standards iterated in the project specifications, which typically take precedence over design drawings. Some defects are not necessarily pertaining to workmanship, but deviation of design. In either case, a contractor is notified of the shortcoming and given an opportunity (usually one-year) to repair or make good on it. 

This one-year warranty and contractor ‘right to repair’ is often a misinterpretation of AIA 201 General Conditions (in thirty states) Section provides that:

“In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof … or by terms of any applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of notice from the Owner to do so …”

However, nothing in section 3.5.1 establishes such a limitation period of the contractor’s requirement to pay for the work to be corrected. Further to the point, AIA 201 Section 12.2.5 states:

“Nothing contained in this Section 12.2 shall be construed to establish a period of limitation with respect to other obligations the Contractor has under the Contract Documents. Establishment of the one-year period for correction of Work as described in Section 12.2.2 relates only to the specific obligation of the Contractor to correct the Work, and has no relationship to the time within which the obligation to comply with the Contract Documents may be sought to be enforced, nor to the time within which proceedings may be commenced to establish the Contractor’s liability with respect to the Contractor’s obligations other than specifically to correct the Work.”

Additionally, In absence of such remedy, an owner may be entitled to retain another contractor to complete the work, and seek reimbursement from the contractor at fault. There are protocols for this remedy, such as termination of contract, of which an expert in the process should be retained. That’s owing to the complexity of coordinating a replacement effort that may be untimely, inequitable, or both. Failure to issue a termination notice could result in an owner paying twice: once for the original contractor, and again for the replacement.

Second on the list of construction breach of contract claims are schedule delays. Such delays affect the vast majority of construction schedules; including a staggering 90% of megaprojects. Delays are experienced in a myriad of ways that hold blameful one or more parties often simultaneously. 

Parties seeking to indemnify themselves from damages arising from schedule delays may exercise a ‘no damage for delay’ clause, if it is in the contract. The enforcement of the no damage for delay clauses varies depending on the contract, as well as the state of jurisdiction. It’s also dependent on the cause of delay, and the extent. As such, there are exceptions to these clauses, such as unreasonable delays, delays not contemplated by parties, active interference, and bad faith.

Nonetheless, contractors are rather feckless in preparing delay or disruption claims for a number of reasons:

  • Inability to prepare baseline with proper critical path
  • Failure to correctly track progress and compare against the baseline
  • Deficient project logic in TIA (time impact analysis
  • Lack of acceptable methodology in calculating production rates and measured-mile

Therefore, only larger delay claims are ever presented for litigation, and those achieve a low return of investment. A breach of contract causing a delay can be established far more easily than the duration and impact of the delay thereby stymying compensation. In other words, one can demonstrate the cause of the delay, but be unable to quantify the effect.

The troublesome disruption claim is even more nebulous owing to its elusive nature: iwork may be disrupted or productivity affected, unlike a delay that can be easily quantified in terms of stop and start. 

Thus are contractors left holding the short end of the stick, however, this is not to say designers and ownership are immune to breach of contract. For example, an owner may not make timely decisions to facilitate design criteria that needs to be conveyed to the contractor, causing a delay. The contractor is then put upon to make short work of issuing submittals and putting work in place. In my experience, if either ownership or design teams are blameful of holding up the design process, they may attempt to then shift accountability on to the contractor by rejecting his submittals, further preventing prosecution of the work. 

“compensable delay claim’ is a virtual oxymoron

The solution to indemnifying an entity against breach of contract is to meet contract requirements, and carefully document the history. Of equal import is to document and accurately track in a bona fide schedule any diversions or delays to the process, as this material will be required as back-up, down the line as claims rear their ugly head.

 Because most contractors eschew the retaining of a trained CPM scheduler, they lack a solid baseline from which to track delays. They will endeavor to do so retroactively or forensically perhaps with the aid of a consultant, however, this strategy seldom yields compelling results. Some consultants may not be up to the task, but more likely the contractor simply doesn’t have the background documentation to facilitate the consultant’s work.

Finally, most scheduling consultants use inefficient software to generate unvalidated forensic and analytic results: neither Primavera nor MS Excel – the two most used platforms – has such capabilities as a platform such as Deltek Acumen Fuse. In the words of Sean Connery, they “… bring a knife to a gun fight. Is it any wonder the term ‘compensable delay claim’ is a virtual oxymoron?