Hidden Hazards: Minimize Disputes with Contracts that Cover Concealed, Unforeseen and Changed Conditions on Retrofit Projects
By: Jason Copley, Michael Schwartz and Matthew Hentz
Retrofit projects are frequently complicated by incomplete information, the discovery of unknown existing conditions and, of course, owner-directed changes that may flow from these issues. These problems can create friction over the added costs that typically follow. A well-drafted contract with precise terms covering these events is essential for owners, designers, general contractors and subcontractors alike to minimize disputes.
The Framework of Risk Allocation
Every construction contract is fundamentally an exercise in allocating risk and responsibility. Because risk can never be fully eliminated, the contract must clearly identify which party bears specific liabilities to ensure a balanced and effective agreement.
Owners are clearly at risk for the added costs that flow from certain conditions, unless they can transfer that risk to a contractor. In the current market, owners and designers often provide surveys, test reports and other information and then attempt to shift that risk to contractors. This is typically accomplished through contract language that requires the contractor to accept the accuracy of the provided information and to represent that it has inspected the project and is unaware of any conditions that would result in added costs beyond those reflected in the contract documents.
Standard AIA and ConsensusDocs forms are common and do not shift this risk to contractors; modified forms typically do attempt to shift the risk to contractors, who may then work to transfer this risk to subcontractors. Where the “price is right,” and the risk is limited, this may be a good attachment. However, when the costs are great after actual conditions are uncovered, disputes over the responsibility for the added cost often follow.
Navigating Concealed, Unforeseen and Changed Conditions
It is well known that concealed and unforeseen conditions are some of the most common factors leading to disputes on retrofit construction projects. Similarly, owner-directed changes are also frequently encountered on retrofit projects, often in response to the conditions encountered. These considerations can lead to significant disputes over responsibility for project delays and costs. Contractors and subcontractors are well-served to be sure to limit the risk of unknown conditions and costs becoming their problems. This effort requires clear limitations in construction contracts on the risks transferred. Reviewing standard AIA risk-transfer provisions against proposed contract language allows contractors to push back on terms that improperly assign unknown project risks to them. Contracts need to clearly and precisely define how unforeseen conditions will impact schedule and cost.
When such conditions are encountered, contractors must strictly comply with contractual notice provisions, or claims for cost and time may be waived, even where the result is harsh; many states will strictly enforce such provisions. Further, the payment process for contractors commonly contains release language on claims that must be submitted with each monthly payment application. Failing to expressly reserve rights during this payment process may similarly waive pending claims for concealed, unforeseen and changed conditions. Further, almost all contracts require change orders to be executed before additional work is performed. Failure to follow the process of requesting change orders or objecting to work directives that require extra work before proceeding may also result in a waiver. Therefore, it is critical to comply with your contract, which often requires consultation with counsel to navigate these legal challenges.
Proactively negotiating and understanding key provisions is the most effective way to protect a contractor from schedule and cost risks. Proper documentation and compliance with contractual requirements are practical tools that will protect profits when unforeseen or changing conditions need to be resolved to keep retrofit projects moving forward.
