Issues of Facility ConstructionSelecting a contractor and negotiating the contract

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 same issues 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 a design/build contractor who will both design and construct the project, or instead hire an architect to design the project and separately hire a contractor to build it. Second, the owner must consider how to negotiate the construction contract to protect himself from contractor defaults and defects.

Design/Build or Architect-Contractor

From the owner's perspective, there are certain advantages to using a design/build contractor in lieu of following a traditional architect-contractor-type arrangement. With design/build contracts, the contractor has the singular responsibility for both the design and construction and, therefore, if problems do occur, the owner can recover directly from the 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 performance specifications rather than simply building the structure according to a set of plans. Therefore, if the plans are inadequate, the contractor is responsible for the additional costs to correct the problem rather than the owner.

Another advantage of using a design/build contractor is that the project can presumably be completed within a shorter period of time, since the contractor can begin work on initial 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 familiar methods 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 design professional, commonly the architect, does not act as the owner's agent and would not be available to validate the progress and quality of the contractor's work. Therefore, the owner loses the ability of the architect to inform the owner about defects and deficiencies in the contractor's work. With design/build contracts, the owner has to hire another party to perform project inspections or the owner will assume the risk that the contractor is performing the work properly. An additional problem with design/build contracting is that most design/build contracts are entered into by negotiation rather than 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 an architect to prepare a set of plans and specifications for the project, which is then used to obtain bids from certain general contractors. This provides for competitive bidding among the contractors and allows the owner to get lower prices for the work, since each contractor is trying to underbid the other. The owner then separately contracts with the general contractor to perform the construction of the architect's design. Under this method, the owner can use the architect to oversee the contractor's work and determine the progress and quality of that work. However, in this case, the owner would be warranting the sufficiency of the plans provided to the contractor and would be liable for any increased costs arising from defective or inadequate plans (which the owner would then seek to recover back from the architect). Additionally, there are no time savings in such a tripartite contractual arrangement between the owner, architect and contractor because the contractor does not even bid on the contract, much less begin work, until the design has been finalized.

Selecting the Contractor

Assuming that the owner approaches the project by first hiring an architect to design the work and then putting the plans and specifications out for competitive bidding, how should an owner decide which contractor should build the project? Simply being the lowest bidder should not be the only criteria for being accepted to build a project. Instead, it is highly recommended that the owner evaluate the interested contractors on issues other than price to determine which contractor is best suited to perform the work. Many owners will utilize a type of questionnaire for the contractor submitting a bid on a project in order to select the most appropriate one. The questionnaire would seek information that would include the following items:

  1. How long has the general contractor been in business?
  2. Who are the owners and operators of the business and who would be assigned to build the project?
  3. What types of previous projects has the contractor performed specifically in the area of self-storage?
  4. What has been the cost of similar projects performed by the contractor?
  5. What are the number of projects currently underway by the contractor?
  6. Does the contractor have a history of claims by its subcontractors or by owners?
  7. Has the contractor ever been in litigation or arbitration with its subcontractors and/or owners?
  8. Does the contractor carry adequate insurance?
  9. Does the contractor have bonding capacity?

Most importantly, the contractor should be required to provide to the owner bank references and five references of major projects completed within the last five years. The general contractor should also be required to provide as part of its bid a certified financial statement of the past five years of its business to demonstrate its fiscal stability. Assuming that the contractors competitively bidding on the owner's work have priced the work fairly and have answered the questions asked by the owner concerning their qualifications, the owner can then select the best contractor to build the project. The next step is to prepare the construction contract.

Negotiating the Contract

The parties need not reinvent the wheel each time a construction contract is prepared for the development of a project. There are many contract forms that have previously been prepared through the American Institute of Architects (AIA), or through a collaborative effort 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 as to provide protection for all parties to the project, including the owner, architect and contractor. It is essential that parties involved in a construction project enter into written contracts to memorialize their agreements concerning the work to be performed. Verbal agreements simply do not work and ultimately can result in significant disputes between the parties. With written contracts, the parties will be able to rely on the document to respond to the much asked question, "What did we agree to?" Within a construction contract, there are numerous provisions that should be included, but the following are certain items that are essential for a property owner and will help the owner if disputes arise concerning the construction of the facility:

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

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

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

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

Insurance. With every construction project, there should be insurance in place both by the owner and the contractor to ensure that if there is any personal injury or property damage during the project that all claims will be covered. Commonly, the contractor will have liability and worker's compensation policies and may also provide builder's risk insurance. The owner should also confirm that it has proper liability insurance 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 that there is sufficient and proper coverage for all types of risk that may arise on the project during construction.

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

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

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

Even with the careful selection of a contractor and the proper drafting of the construction contract, nothing can truly prevent the possibility of disputes between an owner and its contractor. However, with proper planning by an owner, the magnitude of potential 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 Inside Self-Storage and a regular speaker at Inside Self Storage Expos. He may be reached at (404) 364-4626.

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