Issues of Facility Construction

Selecting a contractor and negotiating the contract

By Scott Zucker

A property owner deciding to construct a self-storage facility must address the sameissues that all owners face, whether they're developing their properties for self-storage,office, retail or even industrial use. First, the owner must choose whether to hire adesign/build contractor who will both design and construct the project, or instead hire anarchitect to design the project and separately hire a contractor to build it. Second, theowner must consider how to negotiate the construction contract to protect himself fromcontractor defaults and defects.

Design/Build or Architect-Contractor

From the owner's perspective, there are certain advantages to using a design/buildcontractor in lieu of following a traditional architect-contractor-type arrangement. Withdesign/build contracts, the contractor has the singular responsibility for both the designand construction and, therefore, if problems do occur, the owner can recover directly fromthe contractor for any deficiencies in either the design or construction of the project.Also, in a design/build contract, the contractor agrees to meet the owner's performancespecifications rather than simply building the structure according to a set of plans.Therefore, if the plans are inadequate, the contractor is responsible for the additionalcosts to correct the problem rather than the owner.

Another advantage of using a design/build contractor is that the project can presumablybe completed within a shorter period of time, since the contractor can begin work oninitial phases of the project while later phases of design are being completed. Further,since the contractor has control over design details, the contractor can use familiarmethods and processes in building the structure that may result in savings to the owner.

Obviously, a disadvantage of using a design/build contractor is that the designprofessional, commonly the architect, does not act as the owner's agent and would not beavailable to validate the progress and quality of the contractor's work. Therefore, theowner loses the ability of the architect to inform the owner about defects anddeficiencies in the contractor's work. With design/build contracts, the owner has to hireanother party to perform project inspections or the owner will assume the risk that thecontractor is performing the work properly. An additional problem with design/buildcontracting is that most design/build contracts are entered into by negotiation ratherthan competitive bidding, and the owner may not obtain the lowest price on the project.

The traditional method of contracting for construction is when the owner first hires anarchitect to prepare a set of plans and specifications for the project, which is then usedto obtain bids from certain general contractors. This provides for competitive biddingamong the contractors and allows the owner to get lower prices for the work, since eachcontractor is trying to underbid the other. The owner then separately contracts with thegeneral contractor to perform the construction of the architect's design. Under thismethod, the owner can use the architect to oversee the contractor's work and determine theprogress and quality of that work. However, in this case, the owner would be warrantingthe sufficiency of the plans provided to the contractor and would be liable for anyincreased costs arising from defective or inadequate plans (which the owner would thenseek to recover back from the architect). Additionally, there are no time savings in sucha tripartite contractual arrangement between the owner, architect and contractor becausethe contractor does not even bid on the contract, much less begin work, until the designhas been finalized.

Selecting the Contractor

Assuming that the owner approaches the project by first hiring an architect to designthe work and then putting the plans and specifications out for competitive bidding, howshould an owner decide which contractor should build the project? Simply being the lowestbidder should not be the only criteria for being accepted to build a project. Instead, itis highly recommended that the owner evaluate the interested contractors on issues otherthan price to determine which contractor is best suited to perform the work. Many ownerswill utilize a type of questionnaire for the contractor submitting a bid on a project inorder to select the most appropriate one. The questionnaire would seek information thatwould include the following items:

Most importantly, the contractor should be required to provide to the owner bankreferences and five references of major projects completed within the last five years. Thegeneral contractor should also be required to provide as part of its bid a certifiedfinancial statement of the past five years of its business to demonstrate its fiscalstability. Assuming that the contractors competitively bidding on the owner's work havepriced the work fairly and have answered the questions asked by the owner concerning theirqualifications, the owner can then select the best contractor to build the project. Thenext step is to prepare the construction contract.

Negotiating the Contract

The parties need not reinvent the wheel each time a construction contract is preparedfor the development of a project. There are many contract forms that have previously beenprepared through the American Institute of Architects (AIA), or through a collaborativeeffort of the Associated General Contractors and the American Subcontractors' Association(AGC/ASA). Whatever contract is used, it is important that the document be balanced so asto provide protection for all parties to the project, including the owner, architect andcontractor. It is essential that parties involved in a construction project enter intowritten contracts to memorialize their agreements concerning the work to be performed.Verbal agreements simply do not work and ultimately can result in significant disputesbetween the parties. With written contracts, the parties will be able to rely on thedocument to respond to the much asked question, "What did we agree to?" Within aconstruction contract, there are numerous provisions that should be included, but thefollowing are certain items that are essential for a property owner and will help theowner if disputes arise concerning the construction of the facility:

Scope of Work. It is vitally important that the scope of work as described inthe specifications and drawings prepared by the architect be identified in the contractand incorporated by reference. To the extent the scope of work is identified, this willeliminate questions as to whether certain work performed by the contractor is in theoriginal contract or is an extra to the contract.

Time. A schedule stating when the project is expected to start and finish isespecially important to the owner since the owner must be able to market to its customerswhen the facility will be open for business. Unless the parties are clear as to when theconstruction is to begin and end, the contractor will have too much flexibility inscheduling the performance of the project and will have no liability for completing theproject late.

Payments. A method needs to be included in the contract to determine thecontractor's entitlement for payment. A common practice is to use progress payments. Underthis process the contractor submits its invoice to the owner based upon the percentage ofwork performed. Once an inspection is complete, the percentage amount of the contractmatching the percentage amount of work performed will be paid. The owner can then retain acertain percent of that payment from the owner as retainage until the project iscompleted.

Changes. There are always changes on construction projects. Therefore, thereneeds to be a procedure in place for handling changes in the work. Changes should be madeonly by written agreement between the owner and the contractor. This way, there cannot beany disputes concerning verbal changes and the owner will be protected from paying forchanges that the contractor may have unilaterally made during construction. The writtenchange order must address the specific change in the scope of the work as well as theagreed upon price for the change. Further, if the change to the work will affect thecontract time or schedule, this must also be identified in the change order.

Insurance. With every construction project, there should be insurance in placeboth by the owner and the contractor to ensure that if there is any personal injury orproperty damage during the project that all claims will be covered. Commonly, thecontractor will have liability and worker's compensation policies and may also providebuilder's risk insurance. The owner should also confirm that it has proper liabilityinsurance to protect itself from other losses that may occur during project construction.The best course of action is for the owner and the general contractor to confirm thatthere is sufficient and proper coverage for all types of risk that may arise on theproject during construction.

Bonding. Depending on the size of the project, it may be wise to obtainperformance and payment bonds from the general contractor. A performance bond guaranteesthat if the contractor defaults or fails to finish the work on the project, the bondingcompany will step in and have another contractor finish the work at the original price. Apayment bond guarantees that subcontractors and suppliers who have performed work on theproject will be paid, reducing the risk that these subcontractors or suppliers will fileliens on the project and cloud its title. In lieu of bonding, many times an owner will besatisfied by getting a personal guarantee from the owner of the contracting company toassure that performance will be met or payment will be made to subcontractors orsuppliers.

Termination. The contract should allow the owner to terminate the contractor onthe project if the contractor fails to perform, fails to pay its subcontractors andsuppliers, disregards laws or ordinances, files bankruptcy, or is guilty of other breachesof the contract. Termination of a contractor is a drastic remedy and, therefore, the ownershould only enforce the contract right as a last resort. If terminated, the owner shouldbe entitled to recover back from the contractor any excess costs it incurs to complete thework beyond the original contract price.

Disputes. If a contractor defaults or performs defective work on the project anddoes not remedy the problem, the owner may be left in a situation in which they mustpursue legal claims against the contractor for breach of contract, breach of warrantyand/or negligent construction. Due to the tremendous costs of litigation, it is common forparties in a construction contract to agree to resolve their disputes through alternativedispute procedures such as arbitration. Arbitration is less costly and more efficient, andthe panel of arbitrators selected to decide the case is comprised of individuals familiarwith the construction industry and construction disputes.

Even with the careful selection of a contractor and the proper drafting of theconstruction contract, nothing can truly prevent the possibility of disputes between anowner and its contractor. However, with proper planning by an owner, the magnitude ofpotential disputes can be reduced.

Scott Zucker is an attorney with the firm of Weissmann & Zucker, P.C. Mr.Zucker, who specializes in self-storage law, is a frequent contributor to InsideSelf-Storage and a regular speaker at Inside Self Storage Expos. He may be reached at(404) 364-4626.