Others see danger in the demand to give up lien rights, hefty penalties for delays and design mistakes, and excessive liability insurance requirements. One Houston specialty contractor summed up that last requirement as “my insuring of your sole negligence.”
Contractors say demands that they waive their rights to recovering consequential damages—while also being left open to efforts by the developer or owner to recover damages from them—are another major warning sign.
Consequential, or indirect, damages are typically the big money in court cases. Owners are able to seek potential cases for money for lost rents, sales, profits or other damages they contend stem from the delay or disruption of their plans. Who pays for those liabilities is one of the hottest potatoes.
Madigan warns that large retail chains are demanding contractors waive the right to extra payments to cover mobilization and demobilization costs if work is halted for weeks or months.
The Upside of Capped Damages
Liquidated damages, such as those facing the construction team for Edmonton, Alberta’s delayed Walterdale Bridge, have a beneficial side if they are capped. Problems with steel fabrication may delay the bridge’s completion by as much as a year, city officials say.
Fredric Plotnick, an engineer and attorney who helps with schedule-related problems and claims, says capped damages are actually “a contractor’s best friend” because they provide a ceiling on the potential liability. Some companies put any potential damages in bids.
Environmental liability is another unwanted risk that gets passed to project members.
For Bruce Holland, chief executive of Holland Construction in Swansea, Ill., it is a major concern. Holland says he had had developers insist his company take on an “unclassified site” where the environmental issues and potential contamination are unknown.
The problems could range from buried oil drums and old transformers to a fill material on the site that isn’t properly compacted and doesn’t have proper load-bearing capacity. “We must do a lot of inspections and carry a fair contingency as well,” Holland says.
For James Streitz, chief financial officer of TAIT & Associates, a Santa Ana, Calif.-based engineer, a big bugaboo is seeing the phrase in a contract that requires his firm to use “the highest standard of care.”
“As the attorneys tell me there is no such thing as the highest standard of care,” he says. “The word highest is a tough one to accomplish [and has] never been achieved.” Streitz is certain there is a trend toward “pushing risk onto other parties,” and that insurance costs and litigiousness are driving it.
Right now, negotiating skill and strategy are crucial. In the resurgent economy, designers and contractors could gain an advantage.
“When times are good … even as small contractors, we are successful going to the larger clients and trying to mitigate that risk by negotiating,” Madigan says. “When times are not so good, we have to take work just like everyone else.”
