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Gail S. Kelley is a Professional Engineer and LEED Accredited Professional as well as a licensed attorney in Maryland and the District of Columbia. Gail has an extensive background in design and construction having worked in construction management, structural design, and structural evaluation.
1 Law and Government 1
1.1 Introduction / 1
1.1.1 The Powers of Governments / 1
1.1.2 City and County Governments / 2
1.1.3 The Powers of the Federal Government / 2
1.2 The Sources and Hierarchy of Law / 3
1.2.1 The Constitution / 3
1.2.2 Statutes and Ordinances / 3
1.2.3 Agency Regulations / 4
1.2.4 International Treaties / 4
1.2.5 Appellate Court Opinions / 4
1.3 The American Judicial System / 4
1.3.1 Structure of the Court Systems / 5
1.3.2 Federal Trial and Appeals Courts / 5
1.3.3 State Trial and Appeals Courts / 6
1. 4 Common Law / 6
1.4.1 Stare Decisis / 7
1.4.2 Restatements of the Law / 7
1.5 Legal Codes / 8
1.5.1 Uniform Codes / 8
1.5.2 The Uniform Commercial Code / 9
1.6 Legal Doctrines / 9
1.7 Choice-of-Law Clauses / 10
1.8 Criminal Law versus Civil Law / 11
1.9 Cause of Action / 11
1.10 Summary Judgment / 12
2 Basic Legal Principles 15
2.1 Legal Issues in Construction / 15
2.2 Principles of Contract Law / 15
2.2.1 Unilateral Contracts versus Bilateral Contracts / 16
2.2.2 Oral Contracts / 16
2.2.3 Third-Party Benefi ciaries / 17
2.2.4 Contract Interpretation / 17
2.3 Principles of Agency Law / 21
2.3.1 Apparent Authority / 21
2.3.2 The Principal’s Liability for the Agent’s Acts / 22
2.3.3 Ratifi cation / 22
2.4 Principles of Tort Law / 23
2.4.1 Intentional Torts / 23
2.4.2 Unintentional Torts (Negligence) / 23
2.4.3 Strict Liability / 27
2.4.4 Misrepresentation / 28
3 Project Participants 29
3.1 The Owner / 29
3.1.1 Access to the Building Site / 30
3.1.2 Restrictions on Use of the Property / 31
3.2 The Design Professional Team / 31
3.2.1 Site Evaluation Consultants / 32
3.2.2 The Geotechnical Consultant / 33
3.3 The Construction Team / 33
3.3.1 Subcontractors and Suppliers / 34
3.4 Construction Lenders / 34
3.4.1 Collateral Assignment to Lender / 35
3.4.2 Other Lender Requirements / 35
3.4.3 Construction Loans / 36
3.4.4 Bond Financing / 37
4 Project Delivery Systems 39
4.1 Design-Bid-Build / 39
4.2 Multiple Primes / 41
4.3 Construction Management / 41
4.3.1 Agency Construction Management / 42
4.3.2 Construction Management At-Risk (CMAR) / 42
4.4 Design-Build / 43
4.4.1 Design-Build Proposals / 44
4.4.2 Advantages and Disadvantages of Design-Build / 45
4.4.3 Bridging Consultants / 46
4.5 Engineer-Procure-Construct (EPC) / 46
4.6 Turnkey Construction / 47
4.7 Integrated Project Delivery (IPD) / 47
4.8 Fast-Track Construction / 47
4.9 Public-Private Partnerships / 48
4.9.1 History of Public-Private Partnerships / 49
4.9.2 Constraints on Public-Private Partnerships / 49
5 Construction Contracts 51
5.1 The Construction Contract / 51
5.1.1 Prebid Conferences / 51
5.1.2 Right to Reject Bids / 52
5.2 The Contract Documents (Owner-Contractor) / 52
5.2.1 The Contractor’s Bid / 53
5.3 Confl icts between the Documents / 54
5.4 Errors in the Documents / 54
5.4.1 Latent Discrepancies / 55
5.5 Specific over General; Written over Printed / 56
5.6 Interpretation against Drafter / 56
5.7 Specifications / 57
5.8 Description of the Work under a Construction Contract / 57
5.9 Third-Party Beneficiaries / 58
5.10 Industry Standard Forms versus Custom Forms / 58
5.10.1 Drafting Custom Forms / 59
5.10.2 AIA Contract Documents / 60
5.10.3 Engineers Joint Contract Documents Committee (EJCDC) / 62
5.10.4 ConsensusDOCS / 63
5.10.5 Comparing the AIA, EJCDC, and ConsensusDOCS Documents / 64
5.10.6 AGC Forms / 65
5.10.7 Other Industry Standard Forms / 65
5.11 Commencement of Work Prior to Contract / 65
5.11.1 Letters of Intent / 66
6 The Design Process 67
6.1 Design Responsibilities / 67
6.1.1 Contractor’s Responsibility for Design / 67
6.1.2 Value Engineering / 68
6.2 The Owner’s Program / 68
6.3 The Design Agreement (Owner-A/E) / 68
6.3.1 Schematic Design Phase / 69
6.3.2 Design Development Phase / 69
6.3.3 Construction Documents Phase / 69
6.3.4 Bidding or Negotiation Phase Services / 70
6.3.5 Construction Phase Services / 70
6.3.6 Basic Services versus Additional Services / 71
6.3.7 The A/E’s Compensation / 71
6.4 Standard of Care Applicable to Design Services / 71
6.4.1 Contractual Standard of Care / 72
6.4.2 Proving Violation of the Standard of Care / 73
6.4.3 Implied Warranties / 73
6.4.4 Designing to the Owner’s Budget / 74
6.4.5 The A/E’s Liability for its Estimate / 74
6.5 Ownership of the Design Documents / 75
6.5.1 Use of the Plans and Specifi cations / 75
6.6 Termination of the Design Agreement / 76
7 The Procurement Process 77
7.1 Selection of Contractors for Public Projects / 77
7.1.1 The Bid Package / 78
7.1.2 Duty to Award to the Lowest Bidder / 78
7.1.3 Bid Responsiveness / 78
7.1.4 Responsible Bidder / 79
7.1.5 Bid Protests / 80
7.1.6 Bid Security / 81
7.1.7 “Best Value” Awards / 81
7.2 Selection of Design Professionals / 82
7.3 Alternatives to Design-Bid-Build in the Public Sector / 83
7.3.1 Design-Build Construction in the Public Sector / 83
7.4 The Federal Acquisition Regulation (FAR) / 84
7.5 Procurement on Private Projects / 85
8 Pricing Construction Projects 87
8.1 Fixed-Price Contracts / 87
8.1.1 Fundamental Characteristic of a Fixed-Price Contract / 87
8.1.2 Allowances / 88
8.1.3 Material Price Escalation Clauses / 88
8.1.4 Index Pricing / 89
8.2 Cost-Plus Contracts / 89
8.2.1 Labor / 90
8.2.2 Subcontracted Work / 90
8.2.3 Heavy Equipment / 91
8.2.4 Small Tool Allowance / 91
8.2.5 Reasonableness or Necessity of Costs Incurred / 91
8.2.6 Contractor’s Overhead and Profi t / 92
8.2.7 Estimates and Cost-Plus Contracts / 92
8.2.8 Timely Payment Discounts / 93
8.2.9 Audit Rights / 93
8.3 Cost-Plus with Guaranteed Maximum Price / 93
8.4 Unit-Price Contracts / 94
8.4.1 Variation in Estimated Quantities (VEQ) Clauses / 94
8.5 Unbalanced Bidding / 95
8.6 Bidding When the Design Is Incomplete / 96
9 Subcontractors and Suppliers 97
9.1 Subcontractors versus Suppliers / 97
9.2 Owner’s Control over Subcontractor Selection / 98
9.3 Subcontractor Bids / 98
9.3.1 Enforcing a Subcontractor’s Bid / 99
9.3.2 The Subcontractor’s Right to Enforce Its Bid / 100
9.4 Incorporation by Reference / 100
9.5 Flow-down and Flow-up Provisions / 101
9.5.1 Rights and Liabilities of the Parties under Flow-down Provisions / 101
9.6 Duty to Cooperate and Coordinate Subcontract Work / 102
9.6.1 Limiting the Liability for Coordination / 102
9.6.2 Coordination of Multiple Primes / 103
9.7 Subcontractor Payment / 103
9.7.1 “Pay-If-Paid” versus “Pay-When-Paid” / 104
9.8 Subcontractor Claims against the Owner / 105
9.8.1 The Pass-through System / 106
9.8.2 Liquidating Agreements / 106
9.9 Conditional Assignment of the Subcontracts to the Owner / 107
9.10 Minority and Disadvantaged Business Programs / 108
9.10.1 Federal Minority and Disadvantaged Business Programs / 109
9.10.2 Agency DBE Programs / 111
10 Time for Performance 113
10.1 Time Is of the Essence / 113
10.1.1 Time-Is-of-the-Essence Clauses in Construction Contracts / 114
10.2 Date of Commencement/Time for Completion / 114
10.2.1 Delays in Commencement of the Work / 115
10.2.2 Waiver of Time for Completion / 115
10.3 Substantial Completion / 116
10.3.1 The Signifi cance of Substantial Completion / 116
10.3.2 Establishing Substantial Completion / 117
10.4 Final Completion/Final Payment / 117
10.4.1 Acceptance of Defective Work / 118
10.5 Delays / 119
10.5.1 Determining Whether a Delay Was within a Party’s Control / 120
10.5.2 Delays Due to Weather / 121
10.5.3 Concurrent Delays / 122
10.6 Liquidated Damages / 122
10.7 Constructive Acceleration / 124
10.8 Right to Finish Early / 124
10.9 Milestones / 125
11 Construction Scheduling 127
11.1 Bar Charts / 127
11.2 Critical Path Scheduling / 128
11.2.1 Activity Logic / 128
11.2.2 Arrow Diagramming / 128
11.2.3 Precedence Diagramming / 129
11.2.4 As-Planned (Baseline) Schedule / 129
11.2.5 Float / 130
11.2.6 Critical Path / 130
11.2.7 Multiple Calendars / 131
11.3 Scheduling Specifi cations / 131
11.4 Schedule Updates / 132
11.5 Resource Leveling / 132
11.6 CPM-Based Methods for Proof of Delay Claims / 133
11.6.1 Total Time Analysis / 133
11.6.2 Impacted As-Planned (“What-If ”) / 134
11.6.3 Collapsed As-Built (“But For”) / 134
11.6.4 As-Planned versus As-Built / 134
11.6.5 Windows Analysis / 135
11.7 Expert Witness Testimony / 135
11.8 Using CPM to Estimate Extensions of Time / 136
11.9 Using Bar Charts to Prove Delay Claims / 137
12 Contract Administration 139
12.1 The A/E’s Role in Contract Administration / 139
12.2 A/E’s Liability for Contract Administration / 140
12.2.1 Approval of Shop Drawings and Other Submittals / 140
12.2.2 Site Visits and Inspections / 141
12.2.3 AIA B101 Provisions / 142
12.2.4 The Right to Stop Work / 142
12.2.5 Approval of Progress Payments / 143
12.2.6 Responding to Change Order Requests / 144
12.2.7 Requests for Information, Interpretations, and Clarifications / 144
12.3 A/E’s Role in Contractor Termination / 144
12.4 Initial Decision Maker (IDM) / 145
13 The Payment Process 147
13.1 Progress Payments / 147
13.1.1 Schedule of Values / 147
13.1.2 The Application for Payment / 148
13.1.3 Certifi cation of Payment / 148
13.2 Retainage / 149
13.2.1 Payment of Subcontractor’s Retainage / 150
13.2.2 Claims on Retainage / 150
13.3 Accord and Satisfaction / 150
13.3.1 Payment of an Accord by Check / 151
13.4 Joint Checks / 152
13.4.1 Joint Payee versus Alternative Payee / 152
13.5 Title Insurance / 152
13.6 Obligations of the Lender / 153
13.7 Evidence of Financing / 153
13.8 Prompt Payment Acts / 154
13.8.1 The Progress Payment Request / 154
13.8.2 Payment on Subcontracts / 154
13.9 The Owner’s Payment Obligation on Private Construction / 155
13.10 The False Claims Act / 155
13.10.1 Liability for False Claims / 156
13.10.2 Prosecution of False Claims / 156
13.10.3 State False Claims Act / 157
14 Changes to the Work 159
14.1 Contract Changes / 159
14.1.1 Construction Change Directives / 160
14.2 Pricing Change Orders / 160
14.2.1 Determination of Price by a Third Party / 161
14.2.2 Schedule Adjustments / 161
14.3 Constructive Changes / 161
14.3.1 Owner’s Direction or Improper Rejection of Work / 162
14.3.2 Notice Requirements for a Constructive Change / 162
14.3.3 Waiver of Notice Requirement / 163
14.3.4 Extra Work versus Additional Work / 163
14.4 Federal Government Contracts / 163
14.4.1 Equitable Adjustments / 164
14.4.2 Escrow of Bid Documents / 164
14.5 Authority to Issue Changes / 165
14.5.1 Apparent Authority and Ratification / 165
14.6 Duty to Perform the Changed Work / 166
14.7 Reservation of Rights / 166
14.8 Changes Clauses in Subcontracts / 168
14.9 Documentation of Costs / 168
14.10 Cardinal Changes / 169
14.10.1 The Contractor’s Options / 169
15 Differing Site Conditions 171
15.1 The Purpose of the Differing Site Conditions Clause / 171
15.2 Differing Site Conditions Claims / 172
15.2.1 Type I—Conditions Materially Different Than Indicated / 172
15.2.2 Type II—Conditions of an Unusual Nature / 173
15.3 Limitations on Claims for Differing Site Conditions / 174
15.3.1 Duty to Make a Site Inspection/Duty to Investigate / 175
15.3.2 Disclaimers / 175
15.3.3 Notice / 177
15.3.4 Waiver of Claims / 177
15.4 Variations in Estimated Quantities Clause / 177
15.5 Geotechnical Baseline Summary Report / 178
15.6 Hazardous Materials / 178
15.7 Tort and Breach-of-Contract Actions / 178
15.7.1 Misrepresentation (Intentional or Negligent) / 179
15.7.2 Owner’s Breach of Implied Warranty of Plans and Specs / 179
15.7.3 Failure to Disclose Superior Knowledge / 179
15.7.4 Mutual Mistake / 180
16 Termination of the Construction Contract 181
16.1 Unilateral Termination / 181
16.2 Contractual Termination Provisions / 182
16.3 Termination by the Contractor for Cause / 182
16.4 Termination by the Owner for Cause / 183
16.4.1 Notice and Opportunity to Cure / 183
16.5 Wrongful Termination / 184
16.6 The Role of the Performance Bond Surety / 185
16.7 Termination for Convenience / 186
17 Mechanic’s Liens 187
17.1 Purpose of a Mechanic’s Lien / 187
17.2 Procedures for Filing a Lien / 188
17.3 Lien Entitlement / 188
17.3.1 Liens for Services / 189
17.3.2 Liens for Materials / 189
17.4 Enforcement of the Lien / 190
17.4.1 Priorities / 190
17.4.2 Bonding Off / 191
17.5 Interests Subject to a Lien / 191
17.5.1 Subcontractor and Supplier Claims / 192
17.5.2 Amount of the Lien / 192
17.6 Lien Waivers / 193
17.6.1 No-Lien Contracts / 194
17.7 Rights of Owners and Third Parties / 194
17.8 The Effect of Bankruptcy on a Mechanic’s Lien / 194
17.9 Trust Fund Statutes / 195
17.10 Stop Notices / 195
17.11 Liens on Public Property / 195
18 Construction Insurance 197
18.1 Types of Insurance / 197
18.2 Commercial General Liability / 198
18.2.1 Bodily Injury and Property Damage / 198
18.2.2 Exclusions to Coverage / 199
18.2.3 Additional Insured Status / 200
18.3 Builder’s Risk Insurance / 200
18.4 Workers’ Compensation Insurance / 201
18.5 Professional Liability Insurance / 201
18.6 Wrap-up Insurance Programs / 202
18.7 Waiver of Subrogation / 202
19 Surety Bonds 205
19.1 Use of Surety Bonds in the Construction Industry / 205
19.1.1 Bid Guarantees / 206
19.1.2 Payment Bonds / 206
19.1.3 Performance Bonds / 208
19.2 Rights and Remedies of Sureties / 208
19.2.1 Indemnity Agreements / 209
19.2.2 Discharge of the Surety’s Obligations / 209
19.3 Bonding Requirements / 210
20 Liability for Defective Construction 211
20.1 Determining Liability / 211
20.2 Owner Claims against the Contractor / 212
20.2.1 Warranties / 212
20.2.2 Notice Requirements / 213
20.2.3 Tort Claims / 213
20.3 The Spearin Doctrine / 214
20.3.1 Application of the Spearin Doctrine / 214
20.3.2 Limitations on Spearin / 215
20.4 The A/E’s Liability for Defective Construction / 216
20.5 Affi rmative Defenses / 217
20.5.1 Statutes of Limitation / 217
20.5.2 Statutes of Repose / 218
21 Calculations of Damages 221
21.1 Compensatory Damages / 221
21.1.1 Consequential Damages / 222
21.2 Punitive Damages / 222
21.3 Duty to Mitigate Damages / 223
21.4 Owner’s Damages / 223
21.4.1 Owner’s Damages for Late Completion / 223
21.4.2 Economic Waste / 224
21.4.3 Betterment / 224
21.5 Contractor’s Damages / 226
21.5.1 Equipment Costs / 226
21.5.2 Home Offi ce Overhead / 227
21.5.3 Cost Increases for Labor and Materials / 228
21.5.4 Methods of Estimating Loss of Productivity / 228
21.6 Limitation of Liability / 230
21.6.1 Exculpatory Clauses / 230
21.6.2 Indemnifi cation Agreements / 231
21.6.3 Limitation-of-Liability Clauses / 232
21.6.4 Waiver of Consequential Damages / 233
21.7 Specifi c Performance / 234
21.8 Tort Claims / 234
21.9 Recovery of Damages in the Absence of an Express Contract / 235
21.9.1 Reliance Interest—Promissory Estoppel / 235
21.9.2 Implied-in-Fact Contracts—Quantum Meruit / 236
21.9.3 Restitution Interest—Unjust Enrichment / 236
21.9.4 Quantum Meruit versus Unjust Enrichment / 237
22 The Economic Loss Doctrine 239
22.1 Tort versus Contract Law / 239
22.1.1 Definition of Economic Loss / 240
22.1.2 Development of the Economic Loss Doctrine / 240
22.1.3 Basis for the Doctrine / 241
22.1.4 Public Policy Considerations / 241
22.1.5 Strict Application of the Doctrine / 242
22.1.6 Exceptions to the Economic Loss Doctrine / 242
22.2 Claims of Defective Construction Products / 243
22.2.1 Damage to Other Property / 244
22.3 Claims of Defective Construction Services / 244
22.3.1 Claims of Defective Design Professional Services / 245
22.4 Potentially Dangerous Products (Risk of Harm Exception) / 246
22.5 Negligent Misrepresentation / 247
22.5.1 Negligent Misrepresentation Claimants / 247
22.5.2 Tort versus Contract Claims for Negligent Misrepresentation / 248
23 Alternative Dispute Resolution 249
23.1 Arbitration / 249
23.1.1 Arbitration Clauses / 250
23.1.2 Arbitration Statutes / 250
23.1.3 Arbitration Organization Rules / 251
23.1.4 Prehearing Activities / 251
23.1.5 Selection of Arbitrators / 252
23.1.6 The Arbitration Hearing / 252
23.1.7 The Award / 252
23.1.8 Appealing the Award / 253
23.1.9 Costs of Arbitration / 254
23.1.10 Typical Schedule for Arbitration / 254
23.1.11 Joinder and Consolidation / 254
23.1.12 Waiver of Arbitration Rights / 255
23.1.13 Effect of Arbitration on the Surety / 256
23.2 Litigation versus Arbitration / 256
23.3 Mediation / 257
23.4 Other Types of Alternative Dispute Resolution / 258
23.4.1 Med/Arb / 258
23.4.2 Mini-Trial and Summary Proceedings / 258
23.4.3 Dispute Resolution Boards / 259
23.4.4 Standing Neutrals / 260
23.5 Dispute Prevention / 260
Appendix A: List of Abbreviations 261
Appendix B: Table of Cases 265
Appendix C: Understanding Case Citations 267
Glossary 271
Index 279
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