Case Study: Minimizing Risk

Even when everything seems to be in place, it is hard to anticipate problems that may arise with contracts in the construction industry. This problem is amplified when it comes to contracts’ laguage regarding change-order management. Rob Dolacki, construction manager of Stevens Engineering & Construction Inc., asks the following question:

How can our construction company minimize risk associated with contracts and change management?

RAYMOND A. FYLSTRA
Director and Shareholder
Kubasiak, Fylstra, Thorpe & Rotunno P.C.
“Construction contracts take on added importance when something goes wrong. All parties will pull out the documents and try to determine what was agreed to, if the situation is addressed at all. The best time to study your contract is before you sign it and before the work starts. To minimize the risk of overlooking an important issue, develop a contract checklist of the essential points that should be addressed and resolved before work starts. A few key contract provisions that affect most parties are scope of the work, schedule, price and alternates, payment procedures, unforeseen site conditions, “flow-down” provisions, responsibility for temporary facilities, warranties, termination procedures, mechanics liens, indemnification, insurance, subrogation, dispute resolution procedures and scope of damages, including delay damages, consequential damages and liquidated damages.

Unforeseen events invariably occur, so it is essential to have a contractual framework for addressing changes and specific procedures for following through. Additionally, the contractor must have internal procedures to provide required notices and keep track of change orders from start to finish.  Never do extra work without something in writing.”

RAY STEEB
Founder and CEO
FASTTAC
“Let’s focus on the changes and risk that using new technology creates. Many digital drawing and document technology improvements are being employed to reduce the cost of printing and shipping for the sender.  What is not realized is that it may decrease the sender’s cost, but it increases the costs and risks to the receiver by at least four times. Too many times in the AEC industry, the goal has been to push risk and cost elsewhere—usually down. So, what can we do to reduce our costs while not imposing those costs and risks to those down the food chain?  

Chief considerations should be that the system should be easier, consume less time and reduce all parties’ risk. You should evaluate the goals of using the new technology, the distribution of risk and the IT capability level required to use the system. Good technological improvements should reduce the risk, not just shift it.”  

PHILIP BRUNER
Director
JAMS Global Engineering and Construction Group
“Understand the express and implied rights and obligations under your contracts, and negotiate carefully the allocation of risks imposed by their terms. Although express terms can be appreciated by following the rule of RTC (“read the contract”), implied terms require education. Have your lawyer explain the implied terms likely to be read into your contracts.

Focus your best management resources on managing and controlling the biggest performance risks you have. For changes management, this may mean educating your field managers on identifying constructive changes in the work and providing prompt notice and full documentation of such changes to the party whom you believe ought to pay for them.

Pass down and allocate your retained contractual risks to lower tiers through subcontract and purchase order clauses comparable to the clauses you have accepted in your contract. Retained contractual risks may be spread by clauses that impose duties of indemnification against personal injury or property damage, of early compliance with claim notice requirements, of “paying when paid” and of resolving disputes by methods other than courtroom litigation.

Transfer your retained contractual risks to insurers and sureties through purchase of appropriate property, liability and efficacy insurance policies and requiring your key subcontractors to provide performance and payment bonds or subguard insurance to protect against the risks of nonperformance and nonpayment.”