Common Problems in Construction Projects and How to Avoid Them
By: JOSEPH G. SPRINGER
November 2003
The legal landscape faced by the construction industry has become more challenging over the past few years. Increases in liability suits against contractors, coupled with the reinsurance market that is still absorbing losses from 9/11, have caused several insurers to stop writing policies for contractors. As a result, many contractors, at the urging of their insurance companies and brokers, are reexamining their legal and business practices. Here are five common problems in construction projects and suggestions for how owners and contractors can avoid them.
1. Failure to use good written contracts between the owner, contractor, and subcontractors. Although not legally required, contractors and owners usually enter into a written contract, even for small projects. Contractors, however, often will hire subcontractors and material suppliers with only a phone call. All of the basic reasons that the contractor enters into a written contract with the owner also apply to the relationship between the contractor and its subcontractors and major material suppliers. A good construction contract specifies price, scope of work, and start and completion dates. It is important that the various contracts are consistent and work together. A good construction contract includes provisions for dealing with changes to the project and a mechanism to settle disputes, such as arbitration. For a change to the project to be made smoothly, the process for the owner to make a change to the project set forth in the contract between the owner and contractor must be consistent with the change order process set forth in the contract between the contractor and its subcontractors. Inconsistencies between the various contracts can lead to unintended results. For example, if the contract between the owner and the contractor requires that disputes be settled by binding arbitration, but there is no corresponding arbitration clause in the contract between the contractor and its subcontractors, the subcontractors cannot be forced to participate in the arbitration.
2. Failure to document changes to the project. Any change to the project should be documented by a “change order” that is signed by all affected parties. Even if the complete nature of the change is not yet known, the facts that are known should be promptly documented. A “construction change directive” should be issued and signed to confirm that the change has been requested and made, even if the price of the change has not yet been determined.
3. Failure to document and meet expectations. Even where the parties have entered into a written contract, expectations are often created during the initial sales process and negotiations. While a good contract will disclaim any representations that are not expressly included in the final written contract, it is still important that all parties verify that the final written contract includes all of the agreements between the parties. If the contractor promised certain start and completion dates, those dates should be included in the contract. If the owner has requested specific finishes, those should also be included in the contract.
4. Failure to understand and comply with the mechanics’ lien process. Anyone who provides labor or materials for a private construction project, whether commercial or residential, has a right to file a mechanics’ lien if they do not receive full payment. The requirements for obtaining the lien are strictly construed; an unpaid contractor or subcontractor needs to make sure that it provides the appropriate notices to maintain its lien, either in its contract or by separate written notices. Mechanics’ liens are a powerful collection tool because they provide a lien against the real estate just like a mortgage, even though, unlike a mortgage, the owner does not need to sign anything or even consent to the filing of the lien. Owners therefore need to make sure that the payment terms in their contract contain protections against the filing of mechanics’ liens (e.g., requiring lien waivers equal to all progress payments and full and final lien waivers as a condition to providing final payment).
5. Failure to follow the building code. All new construction is required to meet the building code – if it does not, it will not be passed by the building inspector and no certificate of occupancy will be issued. Minnesota’s statutory warranties that apply to all new residential construction and remodeling are also based upon the building code; a violation of the building code therefore also constitutes a breach of the statutory warranties.
Failure to meet the building code may also result in criminal sanctions. In a decision published earlier this year entitled State of Minnesota v. John Arkell, the Minnesota Court of Appeals upheld a trial court finding that the president of a corporation that constructed a townhome development was guilty of a misdemeanor for violating the building code. The president of the company was ordered to serve jail time and to personally pay criminal restitution in excess of $200,000.
Editor’s Note: Fredrikson & Byron has created a suite of sample construction contracts for use in residential construction for the Builder’s Association of the Twin Cities. The contracts include sample contracts between the contractor and owner with or without a land sale, subcontracts, material supply contracts, and documents to create townhouse or condominium projects. Fredrikson & Byron lawyers are also teaching a series of classes for members of the Builder’s Association of the Twin Cities and the Builder’s Association of Minnesota entitled Avoiding Legal Landmines.