November  17, 2000



Bulletin # 42: The Risk of Unforeseen Conditions

ZZZ Sheet Metal was bidding a large rehab project. A manufacturing plant/warehouse constructed in 1900 was to be converted into luxury apartments. The facility had sat vacant for decades, and was being redeveloped by the City Redevelopment Authority and a private development firm. The city agency and the developer had formed a joint venture called “Riverfront Reborn” to build, finance and lease the new project. As a major HVAC contractor in the area, ZZZ was identified as one of the finalists to install the mechanical systems in the massive project.

Riverfront Reborn had retained a third party construction manager who recommended that major components of the project, including the HVAC system, be contracted on a design/build basis by direct bid. In its bid package, ZZZ received a proposed form of contract, and a set of plans and specifications. An architectural/engineering firm under contract to Riverfront Reborn had prepared the plans. The plans depicted, on a floor-by-floor basis, elevations, the location of structural elements, utilities, floor and wall openings, and other details relevant to the design and performance of the HVAC system. There was no mention of any particular site condition that could be expected to delay or impede the work. Based on the bid package, ZZZ finalized its pricing (on a guaranteed maximum price basis), and submitted its bid. The ZZZ bid was accepted, and the HVAC contractor signed the contract form. The construction manager signed the contract on behalf of the joint venture, and returned a copy to ZZZ.

In starting its work, the HVAC contractor fabricated considerable portions of the proposed system in its shop for installation at the site. However, it quickly became apparent to the ZZZ project manager that what appeared on the plans, and what existed at the site was markedly different. Ceiling heights varied from space to space, and were rarely as reflected on the plans. Wall openings shown on the plans were missing, and large structural beams, not shown on the plans, were regularly encountered. Some of the beams were so large that the designed ductwork had to be substantially rerouted. Most disturbingly, the subcontractor’s employees reported regular contact with crumbling fireproofing materials and old transformers still filled with oil. When the ZZZ project manager approached the construction manager’s representative about the conditions, he was told to simply work around the existing conditions, and that everything would ultimately be taken care of by change order.

With the constant challenge of redesigning and jerry-rigging the system, the subcontractor’s costs were escalating far beyond what had been anticipated. The ZZZ project manager’s demands for change orders became louder and more frequent. Still the work continued. As the project neared completion, the costs of the work associated with changes alone had very nearly equaled the original bid amount. There was also grumbling among the ZZZ work force about exposure to unsafe conditions, and among the ZZZ suppliers regarding unpaid bills. The contractor finally threatened legal action unless it was paid promptly for all of the extra work. The development joint venture (which was fracturing at the seams due to political, cost and delay issues) was non-responsive, and the construction manager simply told the contractor to “get in line.”

The contract ZZZ had signed contained an arbitration clause. The basis of the contractor’s claim was that it should be compensated for the additional work, and delays associated with the unforeseen conditions and erroneous plans. Since a representative of the construction manager had signed the contract, ZZZ commenced its arbitration proceeding against the construction manager. The construction manager responded by pointing to language in the contract stating that it was acting solely in the role of an agent for the owner, and had no legal or other responsibility for performance of the contract. ZZZ modified its claim to include the joint venture.

Each party to the joint venture responded separately in the arbitration proceeding by asserting that ZZZ had breached its contract, and had been negligent in failing to confirm site conditions prior to its commencement of work. The joint venture also claimed that there was no party against which ZZZ could legally proceed since Riverfront Reborn had merely been a contractual joint venture, and was not a legal entity. (Coincidentally, the City and the private developer were also in heated litigation over the project, and each side blamed the other for what had gone wrong.) Rumors ran rampant that the private developer was on the verge of bankruptcy. The same rumor circulated concerning the construction manager, and was proven true several weeks later following the filing of multiple lawsuits and arbitration proceedings against the manager. Frustrated at every turn, the contractor considered an action against the only logical target left: the architect/engineering firm that had prepared the plans. The firm was of national scope, was solvent, and presumably carried substantial insurance. ZZZ added the firm as a defendant claiming that the architect/engineer’s faulty plans had constituted a breach of an implied contract between the contractor and the architect/engineer. ZZZ also alleged that the defective plans constituted a negligent misrepresentation resulting in damages to the contractor. It was recognized that the claim was a long shot, but the contractor was in a very desperate situation. The architect/engineer insisted that it had no contract with ZZZ, and could not be held responsible on a contract theory. It also asserted that the ZZZ contract required the contractor to conduct its own site investigation before undertaking any work, and that the contractor had been negligent in not discovering the discrepancies between the plans and the site conditions. The arbitration panel ultimately ruled that the architect/engineer knew or should have known that its plans and specifications would be relied upon by other construction professionals, and that the pattern of constant and significant errors in the plans (some of which would have been readily discoverable by the contractor and some not) was severe enough to render the architect/ engineer legally responsible to the contractor. The arbitration panel also noted that its decision was impacted by the architect/engineer’s reckless disregard for the safety of construction personnel on the site, since the plans and engineering studies failed to note the presence of the asbestos fireproofing and PCB-laden transformers. The architect/engineering firm and its insurance company quickly signed a settlement agreement with ZZZ (containing a confidentiality provision), and paid the contractor just enough to keep its doors open. ZZZ management breathed a sigh of relief.

Some conditions on a project may come as a genuine surprise to all parties. The condition may relate to sub-surface soils, environmental contamination, or even the structural composition of an existing wall. Whatever the circumstances, when a condition is genuinely concealed and unknown, the standard construction contract forms provide for a reasonable adjustment to the price, so long as the contractor provides prompt notice of the unforeseen condition. However, the contract forms also place a burden on the contractor to verify field conditions, and to take field measurements. If, in the performance of such verification, the contractor discovers errors, inconsistencies or omissions in the plans, these are to be reported promptly to the architect. If the contractor fails to perform its fieldwork, it will face an uphill battle in attempting to recover its additional costs related to errors in the plans. Most contract forms also require immediate reporting, and a stoppage of work if the contractor encounters hazardous substances.

The other object lesson to be drawn from the hypothetical ZZZ project concerns a different type of dangerous (and possibly unforeseen) condition: a contracting structure that does not clearly identify the party responsible for contract performance. The contractor must verify whether the contract is with a general contractor, a construction manager, or the owner. Is the other party to the contract a singlepurpose entity with no assets other than the project or a solvent operating business? Is the legal status of the other entity (i.e., corporation, partnership, limited liability company, joint venture, etc.) understood so that the contractor can be reasonably assured that it has a meaningful remedy if the project goes sour? Not every project requires the contractor to become the construction equivalent of Sherlock Holmes. However, on projects where the contracting structure is unusual, where the contracting entities are not well known, or where the scope of the project is large, work should not begin until the contractor can answer all of these questions to its satisfaction. 

 

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