October 1, 1997

7 Min Read
Handling Construction Disputes

Handling Construction Disputes

By Scott I. Zucker

It appears inevitable, whether it's overthe scope, quality, timing or payment for the work, that disputeswill arise between owners and their contractors duringconstruction projects. Eliminating these conflicts, or evenreducing their magnitude, can save project owners not only money,but the time and stress involved in having to deal with suchproblems. The best way to avoid or reduce construction disputesis to address as many of the questions concerning the project upfront and incorporate the answers to those questions into theconstruction contract. If the terms of the contract are mutuallyagreed upon before the work begins, the owner should be in abetter position to handle any disputes that may arise once theproject proceeds.

Drafting the Contract

1. Scope of Work

A common issue between owners and contractors is whethercertain work performed by the contractor is in the originalcontract or is an "extra" to the agreement. As anextra, the owner would be obligated to pay more than the agreedcontract price for the work to be performed. Therefore, it isvitally important that the scope of the work, as described in thespecifications and drawings prepared by the architect andincorporated by reference into the contract, be clearly spelledout to avoid any ambiguity concerning what is to be included inthe contractor's work.

2. Time

The schedule for performance is additionally crucial foravoiding any disputes between the owner and the contractor as towhen the project is expected to start and finish. The owner mustbe able to rely on the schedule in order to obtain its financing,hire its employees and begin marketing the facility to rent itsunits. Unless both parties are clear as to what the schedule isfor the project, the contractor will have too much flexibility inperforming its work and would have no liability for completingthe project late.

3. Payments

Another large area of conflict betweenowners and contractors is when the contractor should be paid forits work. A method, therefore, needs to be included in theagreement to determine the contractor's entitlement for payment.A common practice is to use progress payments. Under thisprocess, the contractor submits its invoice to the owner basedupon the percentage of work performed to date, and the owner orarchitect then inspects the work to determine that it has, infact, been performed. Once the inspection is complete, thepercentage of the contract value matching the percentage of thework performed will be paid. The owner will then retain 10percent of that payment from the contractor as"retainage" until the project is completed. Finalpayment, which normally includes money from the accumulatedretainage, would occur only when certain final conditions havebeen met under the contract. These conditions include thecompletion of all punchlist items, approval of the work by thearchitect, and the delivery of all lien releases and warrantiesto the owner. These lien releases insure that all of thesubcontractors and suppliers have been paid by the generalcontractor for their work on the project.

4. Changes

There also needs to be a procedure in place for handlingchanges in the work. Without one, the owner and contractor canfind themselves at the end of the project arguing over whetherthe contractor should be paid for its additional work. Theconstruction contract must therefore state specifically howchanges are to be agreed upon. It is recommended that all changesin the work be put in writing and the amount to be paid for thework be agreed upon before it is performed.

5. Termination

The construction contract should also include a provisionwhereby the owner can terminate the contractor if it fails toadequately perform its work, fails to pay its subcontractors andsuppliers, disregards laws or ordinances or files bankruptcy.Terminating a contractor should be an owner's last resort, due tothe fact that it will ultimately cost an owner more money to hirea follow-on contractor to finish the work. If an owner doesterminate its original contractor, the owner should then makeevery effort to put in place another strong agreement with itsfollow-on contractor setting forth the same issues regarding thescope of work, schedule and payment.

Certainly, these are not all of the contract provisions thatneed to be considered when drafting a construction contract. Anowner and the contractor must consider provisions such asindemnification, insurance, bonding, warranties, safetyprecautions, cleanup obligations, responsibility for temporaryfacilities, and the amount of liquidated damages for delay. Allof these issues should be discussed so as to hopefully avoid anydisputes once the project begins.

Attempting to Reach Solutions

If a situation arises (for example, work found to bedefective) the owner and contractor should meet to discuss theproblem and seek to reach an immediate resolution. Often times,this may be nothing more than the contractor's agreeing to fixits work. Yet, if the contractor is slow to respond to theproblems, the owner can then rely on the contract to determineits next step. In this particular example, the terms of thecontract that address approval of the work would be used to guidethe parties. The construction contract would likely contain aprovision that after notice of the defect by the owner, thecontractor has only a short period of time to cure, or fix, thedefect. If the contractor still fails to respond after notice,the owner is then entitled to have the problem fixed and cancredit the cost of the repair against any money owed to thecontractor. Unfortunately, sometimes problems cannot be solvedsimply through discussion. (For example, the contractor may claimthat the problem is due to a bad design, not a workmanshipfailure). Therefore, it will be necessary to take the matter tothe next level.

Commonly, at the next level of a construction dispute, it ishelpful to bring in an architect or an engineer to act as anarbitrator between the parties. The architect or engineer can beasked to render a decision based upon his interpretation of thecontract and the plans for the project. Even if the dispute goesto this "next level," the owner and the contractorshould still be in the mindset of resolving their disputesamicably. If the disagreement expands past this point, it mayrequire the parties to make a "business decision" aboutwhether they want to continue fighting due to the time expenseinvolved. Often times, it will cost more money to fight over adisputed issue than to mutually agree to share the costs to fixthe problem.

Seeking Legal Action

If the terms of the contract or interpretation by an architector engineer do not assist an owner and contractor in resolvingtheir disputes, the conflict might rise to the level of legalaction. Certainly, if the contractor defaults or performsdefective work and the parties cannot amicably reach aresolution, the owner may have no choice but to file a complaintagainst the contractor for its breach of contract. A breach ofcontract complaint is simply a claim that the contractor hasfailed to perform pursuant to the terms and conditions of thecontract. The lawsuit requests that the owner recover the moneynecessary to complete the construction of the project and repairthe contractor's defects. The law allows other causes of actionto be brought against a contractor and may include a breach ofwarranty claim or a claim for negligent construction if thecontractor's actions have lead to personal injury or damage toother parts of the owner's property.

Not all construction disputes can be avoided through the useof good contracts. However, many of the smaller problems thatultimately mushroom into larger ones can often be avoided withthe use of a strong contract and the ability of the partiesinvolved to focus on seeking solutions rather than lawsuits.

Scott I. Zucker is a partner in the law firm of ShapiroFussell Wedge Smotherman & Martin, based in Atlanta. He is anexpert in the field of self-storage law and representsself-storage owners and managers throughout the country inmatters that include contracting for construction, preparinglease agreements, defending tenant claims and handling employmentdisputes. Mr. Zucker also provides, on a consulting basis, adviceto self-storage companies on operational safeguards in the areasof foreclosure proceedings, premises liability andhazardous-waste controls. Mr. Zucker can be reached at (404)870-2232 or via e-mail at [email protected].

Subscribe to Our Weekly Newsletter
ISS is the most comprehensive source for self-storage news, feature stories, videos and more.

You May Also Like