Contributed By Allen Matkins Leck Gamble Mallory & Natsis LLP
Construction contracts fall into two general categories: fixed price, which is sometimes called stipulated sum, and cost-plus, which is typically the cost of work plus the contractor’s fee, not to exceed a guaranteed maximum cost. In a stipulated sum contract, the contractor promises to build the project for a specified price. In a cost-plus or not-to-exceed guaranteed maximum cost contract, sometimes called a g-max contract, the contractor guarantees that the cost of work plus its fee will not exceed a guaranteed maximum sum.
Typically the design professionals (the architects and engineers) will design the project, and the contractor will build it. Sometimes, the same firm does a portion or even all of the design and construction. Those are called design-build contracts, and typically cover projects such as tilt-up industrial buildings and parking structures, where the construction company owns the design and engineering functions.
There are many different methodologies used to allocate risk on a construction project, ranging from indemnifications and warranties to insurance requirements. Ordinarily, the contractor and the owner waive consequential damages.
There are limits to losses. If a contractor is late in completing a project, an owner cannot sue for lost profits. As with any claim for damages, the claimant must prove that damages have actually occurred, typically by preponderance of the evidence. It is typical to waive punitive damages.
Typically, there are no legal limitations on assigning risk to one party or another. Waivers of claims based on intentional tort are invalid as they are against public policy in the United States.
Often contractors are awarded bonuses for timely performance, ie, meeting milestones throughout the course of construction, and achieving substantial and final completion on time. Some contracts call for liquated damages for delays, such as a specific fee per day past the agreed-upon completion date. These can be substantial. Contracts typically include clauses that the prevailing party’s legal fees will be paid, adding to the cost.
It is common to seek parent guarantees, performance bonds and completion bonds, unless a contractor is extremely well capitalized, which most are not. Third-party sureties, or payment and performance bonds, are common; escrow accounts are not. In addition to parent guarantees, significant subcontractors should also be bonded.
While there are exceptions, all contractors, laborers, designers or those involved in providing goods or labor to the “work of improvement” are permitted to lien the job. The relative priority of liens depends on the circumstances. All mechanics liens relate back to the date the first improvement was done to the property. Usually, the construction loan – the deed of trust securing the construction lender – is recorded prior to the commencement of work. If it is not, then all mechanics liens will be senior to the loan.
Property owners can record a bond of 150% of the amount of a lien claim, and the mechanics liens automatically shift from real property to the bond. Mechanics lien claimants have a claim but, instead of lien against property, they will have lien against the bond.
This will vary by municipality. Typically, the issuance of a certificate of occupancy or its equivalent will be from a municipality. After inspection of the fire and life safety systems, vertical transportation, etc, projects will be issued a certificate of occupancy or a temporary certificate of occupancy. In multi-tenant properties like office buildings, one obtains a certificate of occupancy on the entire shell and core of the building, and then temporary certificates of occupancy on each tenant space within the building, until the building is built out, when one can obtain a permanent certificate of occupancy on the entire structure.