How to keep disputes, and lawyers, out of your construction projects.
In an ideal student housing construction world, the plans will be clear and unchanged; the weather perfect; everyone timely paid; the schedule followed. In this dream scenario, there's also plenty of time to have the all the buildings fully complete before starry-eyed students arrive with parents in tow, cars full and rent prepaid. But, the real world sometimes intervenes. The fact is that 90 percent of construction disputes between owners and contractors involve disputed change orders and requests for more money, which can blow a budget and also impact move-in (ugh, sorry Mom and Dad). Especially when there can be many parties involved in the dispute (architect, owner, contractor, subcontractors), finger-pointing becomes the norm...and while everyone plays the fiddle, Rome — or in this case the project —can burn.
That's why knowing how to approach problems related to project changes is crucial to preserving rights related to those changes. Based on having represented student housing developers and builders all over the country, here are the best ways to accomplish this goal and, more importantly, to avoid construction lawyers like me:
Ensure that there is a well-drafted "changes" clause in the contract. The clause should set forth the method for determining additional compensation for changed or extra work and contain deadlines for written notification when something occurs on a project that one party believes may lead to an order that will increase the costs or impact the schedule. There should also be clear consequences if these deadlines are not followed. "Form" contracts like AIA forms are sometimes not best suited for every single project.
Practice clear and prompt written communication when the "change" occurs. It's very simple: Whoever documents best, wins. In most cases, the owner and the contractor agree on whether certain work ordered by the owner constitutes change or adds extra work.
Involve your friendly construction lawyer at an early stage. In most instances, an experienced construction lawyer can quickly and efficiently evaluate a dispute and dispense advice, which can not only help resolve the problem at an early stage, but recommend steps to take to put the party in a better position to be successful in the event of a later dispute. Many times, a one-hour legal review of a proposed change order or contract amendment will save tens of thousands of dollars of legal fees after the festering dispute boils over into a full-blown lawsuit or arbitration.
The question normally comes down to whether the work was within the scope of the original contract or was specifically called for in the plans and specifications that were incorporated into the contract. Each situation is unique, but the general rule is that a contractor is required only to perform in accordance with the original construction agreement. That means if the owner orders work that is beyond what was required in the contract, it falls under the changes clause, and it should entitle the contractor to additional compensation or a time extension, or both.
Problems can occur when the plans are not fully complete but everyone agrees to start work because of scheduling concerns. There can be issues outside of everyone's control, such as worse-than-expected weather. Issues also occur when change work is performed prior to the formal change orders being negotiated and signed. Almost every change clause provides that contractors shall not proceed with extra work until a formal change order has been issued and, otherwise, the contractor proceeds at his peril. However, since as a practical matter this occurs on every project, and no one — especially the owner —wants the contractor to stop work for days or weeks while a formal change order is being processed. There are many court decisions allowing recovery under these facts.
Bottom line: change-order disputes, if not resolved, can bring a student apartment project to a grinding halt. The lawyers get involved. A domino effect occurs: financing issues, loss of pre-sales, filing of mechanics liens (which violates most loan agreements), delays — all of the things that can turn a great student housing project into a literal nightmare of a money pit. Avoid this at all costs, and if not....that's when construction lawyers like me get calls from clients and the meter ("reasonable" fees, of course) starts to tick. It may be that 95 percent of your projects have no major disputes. The problem is that the 5 percent that do can suck every dollar of profit out of a project and impact the finances —and careers — of everyone involved.
David Taylor is a partner at the Nashville, Tenn., office of Bradley Arant Boult Cummings, LLP. He can be reached at email@example.com.