Winning the Owner's Goals for the Architect Agreement and ...

Winning the Owner's Goals for
the Architect Agreement
and Construction Contract
Klehr | Harrison | Harvey | Branzburg LLP
1835 Market Street
Philadelphia, PA 19103
Fax: 215-568-6603
Gregory G. Gosfield, Esquire
Real Estate and Finance
Tel.: 215-569-4164
Email: GGosfield@Klehr.com
Peter J. Norman, Esquire
Litigation
Tel: 215.569-3596
Email: pnorman@klehr.com
THE MATERIAL USED IN THIS MANUAL IS FOR TEACHING
THE PHILADELPHIA CLE SEMINAR.
March 17, 2011

1. OVERVIEW
Winning the Owner's Goals for the Architect Agreement
and Construction Contract
1.1 Development Team
1.1.1 Owner
1.1.1.1 Attorney – structures and describes legal relationships among
team members
1.1.1.2 Financial Analyst – models the project, matches sources and
operating revenue/expenses
1.1.1.3 Insurance Consultant – manages risks of losses due to casualty,
general negligence, professional negligence, contractual liability
1.1.2 Diligence Providers
1.1.2.1 Title Insurer – right of third parties with interests in the land
1.1.2.2 Land Use/Zoning Analyst -
1.1.3 Owner’s Construction Representative (Owner’s representative or
Construction Manager) – eyes, ears and intelligence for owner who is blind,
deaf and dumb
1.1.4 Design Team
1.1.4.1 Architect – Design; Landscape; and Interior Designer –
appearance
1.1.4.2 Engineer – Structural; Environmental; Mechanical Electrical
Plumbing - (MEP); Geotechnical; Lighting; and Acoustic -
functionality
1.1.5 Construction Team
1.1.5.1 Construction Manager -At Risk” –
1.1.5.1.1 The Contractor with whom the Owner enters into a
contract;
1.1.5.1.2 Is responsible for the overall administration of the
Project; and
1.1.5.1.3 enters into subcontracts with all of the
Subcontractors and/or Suppliers
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1.1.6 Funders
1.1.7 Regulators
1.1.5.2 Construction Manager “Not at Risk” –
1.1.5.2.1 The Contractor with whom the Owner enters into a
contract;
1.1.5.2.2 Is responsible for the overall administration of the
Project; but
1.1.5.2.3 does not enter into subcontracts with all of the
Subcontractors and/or Suppliers
1.1.5.3 “General Contractor” – Usually means a CM that is also
supplying some of the working labor for the project and may
hire subcontractors and/or trades. May or may not be
responsible for administration and coordination of the work.
1.1.5.4 Subcontractors/Trade – specialty – work
1.1.6.1 Lenders – Partial source of funds
1.1.6.1.1 Equity paid first
1.1.6.1.2 Assignment of Contracts, Permits and Design – who
pays amount pre-dating assignment
1.1.6.1.3 Inspection timing
1.1.6.1.4 Approval of Change Order and Contract Document
Amendments
1.1.6.1.5 Notice or Consent Requirements
1.1.6.2 Investors –
1.1.6.2.1 Change Orders: Time, Sum, Scope
1.1.6.2.2 Major Events: Budget, Personnel
1.1.6.2.3 Takeover
1.1.7.1 Local law – zoning variance; building permits; land use
conditions; development agreements with escrows; highway
permits; utility availability; capacity (water treatment; storm
water)
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1.2 Project
1.1.8 End Users
1.1.7.2 Specialty long lead items – environmental removal, caps;
planned community warranties and disclosure
1.1.8.1 Tenants –
1.1.8.1.1 Build to suit
1.1.8.1.2 Plans and specifications approvals, timing and defects
1.1.8.1.3 Completion risk – move in liquidated damages
1.1.8.2 Purchasers –
1.1.8.2.1 Take out funds
1.1.8.2.2 Buy-sell
1.1.9 Brokers – Mortgage; Sale; Lease
1.1.10 Payment and Performance Bond Surety –
1.2.1 Location and local issues
1.2.1.1 Entitlement/approval process;
1.2.1.2 Vehicle and pedestrian access;
1.2.1.3 Sight lines and signage;
1.2.1.4 Mechanics liens;
1.2.1.5 Contractor and Subcontractor lanes
1.2.2 Project Description with Alternates: improvements; open space
1.2.3 Special Uses/Approvals:
1.2.3.1 Food (handling and disposal);
1.2.3.2 Liquor;
1.2.3.3 Medical assistance;
1.2.3.4 High rise (staging vertical staging areas);
1.2.3.5 Off-street curbcuts/decelaration/traffic lights; canopies;
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1.3 Contract Time
1.2.3.6 Signage;
1.2.3.7 Storm water;
1.2.3.8 Lighting;
1.2.3.9 Solar/geothermal power.
1.3.1 Substantial Completion/Final Completion:
1.3.2 Delay
1.4 Indemnification
1.3.1.1 certificate of occupancy – temporary, conditional, appealable,
partial (base building/third party premises);
1.3.1.2 third party certification – owner/ owner representative,
architect, lender construction monitor; move-in/turnover ready;
furniture fixtures and equipment, cabling
1.3.2.1 Force majeure including weather conditions: standard of
“outside” control – actual, reasonable, local peer standard;
exclusions – monetary issues (fiscal melt down), unseasonable
weather beyond a fixed period of time.
1.3.2.2 Owner or Contractor Delay: recovery schedule mitigation.
1.4.1 Indemnity for Project related claims
1.4.2 No indemnity for indemnitee’s negligence
1.4.3 Indemnity caps, floors (minimum “deductible”), tipping point (full coverage
upon achieving a threshold amount).
1.4.4 Indemnitor conditions: Notice sufficient to allow response; current
updates; indemnitee marshalling; indemnitee’s co-operation; indemnitee’s
non-interference and non-impairment
1.5 Insurance
1.5.1 General Liability
1.5.2 Professional Liability
1.5.3 Insurer of A Rating by Best
1.5.4 Primary and non-contributory
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1.5.5 Owner as additional insured except professional liability
1.5.6 Elimination of Owner as fiduciary for insurance proceeds.
1.5.7 Increase Architect’s insurance if recourse is limited to fee plus insurance
1.6 Liability:
1.6.1 Breach of contract, gross negligence, violation of law, breach of third party
contracts and warranties.
1.6.2 Carve out for contributory acts leading to liability
1.6.3 Limitations of liability: consequential damages, punitive damages, Fee paid
plus insurance coverage available
1.7 Dispute Resolution
1.7.1 Mediation – adverse no consequences for stalemate
1.7.2 Arbitration – triggered damages are below substantial threshold, compels
resolution, “private”
1.7.2.1 No injunctive relief
1.7.2.2 All necessary parties may not be available
1.7.2.3 No subpoena power
1.7.2.4 No compulsion for discovery
1.7.2.5 Enforceable by stipulations to court order
1.7.2.6 No equivalent to contempt for violation of injunctive relief
1.7.2.7 No breach of attorney-client privilege
1.7.2.8 Three valuations: third is followed
1.7.2.8.1 Average of two closest
1.7.2.8.2 Average of three
1.7.2.9 Baseball – no discretion, must choose the one “closest to
correct”
1.7.3 Litigation: expensive, rules of civil procedure, procedural delay, public
1.8 Termination /Suspension
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1.8.1 For cause – pay for work to date less additional costs incurred in
anticipation of complete work
1.8.2 For convenience – pay for work to date plus a portion of lost future profit
not general conditions. Maybe overhead.
1.8.3 Contractor Remedies
1.8.3.1 Limitation of damages for Owner termination for convenience
1.8.3.2 Limitation of claims against Owner for concealed conditions
1.8.3.3 Limitation on Contractor right to seek additional time
1.8.4 Owner Remedies
1.8.4.1 Delay Damages measured by a per diem fixed charge plus direct
costs of substitute asset.
1.8.4.2 Owner right to cure: a suspension of work for events outside of
Contractor’s control before Contractor can terminate; separate
Owner forces interference; Architect’s obstruction or delay
1.8.4.3 who pays and how if “contributory”
1.9 Promotional Material: Restrictions on Contractor of using Owner and the Project in
promotional material
2. OWNER REPRESENTATIVE CONTRACT
2.1 Services – describe scope of activity as to Work, duration
2.2 Fee – profit and costs for percentage of work performed through completion or
earlier termination for owner’s convenience
2.3 Reimbursables – list and cap
2.3.1 Third party dispute resolution: background issues of document production,
deposition, trial, travel.
2.3.2 Over time or outside of business hours
2.4 Termination:
2.4.1 Transition services
2.4.2 Mitigation of expenses for demobilization
2.5 Assignment:
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2.5.1 Owner Representative : key staff – no assignment, severance, removal or
substitution
2.5.2 Owner – interests assignable to (i) affiliate, (ii) buyer of stock or (iii) assets;
no release from liability
2.6 No impairment:
2.6.1 confidentiality
2.6.2 independent contractor not agent
2.6.3 no conflict of interest
3. ARCHITECT’S AGREEMENT
3.1 Basic Services – number of visits, attendance at construction meetings.
3.1.1 Usual and customary structural, mechanical, electrical engineering services,
interior design.
3.1.2 Specifically:
3.2 Additional Service -
3.1.2.1 Programming
3.1.2.2 Landscape design
3.1.2.3 Architectural Interior Design (B252-2007
3.1.2.4 As-Designed Record drawings
3.1.2.5 Post occupancy evaluation
3.1.2.6 Coordination of Owner’s consultants
3.1.2.7 Telecommunications/data design
3.1.2.8 LEED® Certification (B214-2007)
3.1.2.9 Value Analysis (B204-2007)
3.2.1 Multiple preliminary designs
3.2.2 Measured drawings
3.2.3 Existing facilities surveys
3.2.4 Site Evaluation and Planning (B203-2007)
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3.2.5 Building information modeling
3.2.6 Civil Engineering
3.2.7 Detailed cost estimating
3.2.8 On-site project
3.2.9 Conformed construction documents
3.2.10 As-Constructed Record drawings
3.2.11 Facility Support Services (B210-2007)
3.2.12 Acoustics engineering services
3.2.13 Security Evaluation and Planning (B206-2007)
3.2.14 Commissioning (B211-2007)
3.2.15 Extensive environmentally responsible design
3.2.16 Fast-track design services
3.2.17 Historic Preservation (B205-2007)
3.2.18 Furniture, Furnishings, and Equipment Design (B253-2007)
3.2.19 Elevator Consultant
3.3 Architect Power and Duty – The engagement of an Owner Representative or
Construction Manager does not reduce Architect’s powers or duties
3.4 Services Duration – Substantial Completion; Final Completion; Warrant Period
3.5 Fee – percent; broken down for services
3.6 Instruments of Service: Ownership of design - non-exclusive license
3.6.1 Typically – any drawings, sketches, plans issued by Architect or the design
team on Project.
3.6.2 Architect does not want to design one McDonalds, and see the Owner use
same design for other projects
3.6.3 Owner wants broad license to use from Architect and its consultants
3.6.4 Need for Dispute Provision – So Owner can retain license and use for
Project even if in dispute with Architect – escrow?
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3.6.5 Limited to Project
3.6.6 Upon termination or payment in full, permanent and irrevocable, or at least
waives of claims for use;
3.6.7 Indemnity and release of old architect for use or misuse of Instruments;
3.6.8 Distinguish ownership of materials between Project Documents which are
Owner’s, and proprietary documents which remain owned by the generator
3.7 Indemnity, Insurance –
3.7.1 Insurance on professional liability - not name Owner as additional insured
3.7.2 Project specific;
3.7.3 Five-year tail if “claims made”
3.8 Pre-Design Work:
3.8.1 site conditions known or reasonably knowable; constructability/inferability;
3.8.2 site preparation – inspection; demolition;
4. CONTRACTOR’S CONTRACT
4.1 Contract Sum
4.1.1 Stipulated Sum
4.1.2 Cost of Work and Fee – Owner risk of Contractor inefficiency; caps or preapprovals;
narrow scope.
4.1.3 GMP – Savings to Owner/Contractor; movement among line items;
contingency
4.1.4 Change Order – Caps on overhead and profit as percentage of change,
4.1.5 Overhead – The indirect costs associated with providing and maintaining
the work: office personnel, office rent, sales and advertising.
4.1.6 General Conditions – Costs related to job site conditions :trailers,
temporary heat, water and other utility consumption, toilets and hygiene
faculties.
4.1.7 Contractor Fee:\ – Profit, but sometimes the combined general conditions,
overhead, and profit. Sometimes a contractor will negotiate to exclude
general conditions from retainage as the costs are not from subcontractors
or other hard cost providers.
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4.1.8 Caps on general conditions
4.1.9 Owner or Contractor Delay – Costs of general conditions or overhead
4.1.10 Alternates for add or subtract work – Lighting packages savings; exclusions
to “equal or better” materials;
4.1.11 Allowances for additional work, substitute work, or projected work not yet
priced – Monument signage; fascia signage; audio/visual package; specific
identified finish not yet priced
4.1.12 Unit Prices for increase or decrease in the amount of a work component –
Per outlet, per ceiling fan; per sprinkler
4.2 Qualifications, Assumptions, Conditions
4.2.1 Basis for overhead and general conditions.
4.2.2 Concealed conditions:
4.2.2.1 neither known nor reasonably discoverable (could, should,
would reasonably/likely/any professional) – underground rock;
4.2.2.2 utilities;
4.2.2.3 contaminated soils; testing and inspection; unrenovated sections
4.2.3 Third Party approvals/disapprovals.
4.2.4 Temporary and ancillary work: sight screens; access;
4.2.5 Order of prevailing documents. The Owner needs to be sure the specifics
take precedence over the general.
4.3 Pre-construction Work:
4.3.1 site conditions known or reasonably knowable; constructability/inferability;
4.3.2 site preparation – inspection; demolition;
4.3.3 debris removal.
4.4 Phasing: Rolling Occupancy:
4.4.1.1 work hours;
4.4.1.2 work noise;
4.4.1.3 dust and debris containment;
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4.4.1.4 fences;
4.4.1.5 truck schedules;
4.5 Application for Payment
4.5.1 Timing:
4.4.1.6 finish work and topping
4.5.1.1 5 days before the end of month Contractor delivers a proposed
“pencil” application with back up sufficient to satisfy Owner
and its lenders and other superior third parties, such as
franchisor, ground landlord, etc. (“Capital Providers”).
4.5.1.2 Owner convenes review with Contractor, Architect, and Capital
Providers.
4.5.1.3 Owner, itself or through Architect, accepts or rejects by the
fifth of the month
4.5.1.4 Contractor resubmits acceptable Application
4.5.1.5 Payment with next disbursement by Capital Provider
4.5.2 Qualification Requirements:
4.5.2.1 Work performed (no estimates or projections); materials stored
on site subject to qualifying with required conditions; materials
stored offsite if for long lead items (steel; prefab concrete;
custom windows)
4.5.2.2 Partial lien releases from Contractor and all Subcontractors
conditioned on being paid
4.5.2.3 No change in future work
4.5.2.4 Certified payroll and other required submissions in the case of
public stimulus money (FTE head count, MWBE, Steel, etc.)
4.6 Progress Payment Authorizations
4.6.1 Owner or Owner Representative to administer – may be more motivated
than Architect
4.6.2 Architect – could cause delay or conflict to Owner’s detriment
4.6.3 Independent right of Owner to withhold approval of an Application for
Payment
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4.6.4 Owner right of set-off for payments due from Contractor which have not
been made.
4.7 Retainage
4.7.1 On all payments: exclude retainage on “general conditions”; built in to the
case of milestone; completion,
4.7.2 Through job to (i) 50% Completion, (ii) Substantial or (iii) Final
Completion
4.7.3 Step down from 10% to 5% : disburse retainage to 5% and thereafter retain
only 5%, or suspend further retainage after 10% is retained for 50% of the
job
4.7.4 Releases on line item completion: early subcontractors such as demo and
caissons do not have to wait for final topping of the driveway
4.7.5 Punchlist of only cosmetic work with a scheduled budget at Final
Completion and holdback of 150-200% of estimated cosmetic work
4.8 Releases and Lien Waivers
4.8.1 Partial Lien Waivers and Release of Claims
4.8.1.1 Submitted with every monthly payment application
4.8.1.2 By Contractor, Subcontractors, Suppliers, Architects and
Engineers – anyone working on your project
4.8.1.3 Limits Owner’s exposure at end of Project
4.8.1.4 Valid under PA law to release lien rights
4.8.2 Final Lien Waivers and Release of Claims
4.8.2.1 Submitted with the final Application for Payment by Contractor
4.8.2.2 By Contractor, Subcontractors, Suppliers, Architects and
Engineers – anyone working on your project
4.8.2.3 Valid under PA law to Bar future lien claims
4.8.2.4 More certainty as to Final Payment
4.8.2.5 Should be unconditional from all subs and suppliers, and may
be conditional from Contractor
4.8.3 Final Payment “Float” issue
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4.8.3.1 It is the best practice for the Owner to pay the Contractor for
“payments made” to subcontractors and suppliers, not
“incurred”.
4.8.3.1.1 Owner should get benefit of any deals cut between
Contractor and its subs
4.8.3.2 Accordingly, it should be the responsibility of the Contractor to
make the final payments of retainage to the Owner and then
turn around and seek reimbursement from the Owner for these
costs.
4.8.3.3 Typical Contract language:
4.8.3.3.1 Contractor having furnished evidence satisfactory to
the Owner that all subcontractors and suppliers have
been paid and that there are no claims, obligations or
liens outstanding for labor, services, materials,
equipment, taxes or other items performed furnished
or incurred for or in connection with the Work
4.8.3.4 Reduces suits against Owner by Subcontractors and Suppliers
by abrogating Contractor’s “pay-if-paid” language.
4.8.3.5 Note – Can result in major pushback from Contractors
4.8.4 No waiver by General contractor
4.8.5 Waiver by subcontractor
4.8.6 Bonds
4.8.7 Contract summary
4.8.8 Construction loan exemption
4.8.9 Permanent loan not exempt
4.9 Contractor Services
4.9.1 “Work” under Contract Documents
4.9.1.1 Reasonably inferable - Work includes matters that are
reasonably inferable as part of the work. For example, if the
Contractor is installing a machine into a building system, it is
reasonably inferable that the Contractor must include the tubes
and wires necessary to make the connection, even if they are
not all identified with specificity.
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4.9.1.2 Constructability from known or reasonably knowable
conditions - Contractor must make independent determination
of Constructability and that can it be achieved within the
Contract Time and Contract Sum
4.9.1.3 Compliance with laws applicable to Work (materials, building
code requirements)
4.9.1.4 Contractor or Subcontractor should be responsible for loss due
to the non-compliance of the Work required under the Plans
and Specifications to meet applicable public and private code
requirements applicable to that portion of the work – wrong
slope of sewer pipe
4.9.1.5 Contractor will exercise pro-active diligence in coordinating
work where latent issues are more likely
4.9.1.6 Contractor’s design work, if any, must be equal to the
Architect’s standard.
4.9.2 Supervisor – means and methods
4.9.2.1 Labor harmony – except unrest as part of national actions,
Owner’s separate forces
4.9.2.2 Manufacturer recommendations, not just requirements
4.9.2.3 Remove workers for bad acts: sexual or racial harassment; drug,
alcohol, or weapons; disruptiveness; trespassing
4.9.3 Update for Change Orders with Owner consent to Schedule of Time,
Schedule of Values, Schedule of Subcontractors, all Contract Exhibits
4.9.4 Clean-up daily if in occupied area
4.9.5 Turnover: warranties, manuals, final as-builts, marked-up as builts, by both
Contractor and Subcontractor
4.9.6 Delivery to Owner of (i) as-built CADs and PDFs as well as (ii) operations
and maintenance manuals as a condition of Final Payment to Contractor.
4.9.7 Environmental: No exacerbation of distressed environmental condition.
4.9.8 Contractor will be responsible for maintaining current records of
construction changes and turning over final showing changes from prior
versions and will conduct frequent site meetings of critical path participants
4.9.9 Subcontracts must be subject to a three bid program, and after approved
subcontracts, substitution is subject to Owner approval
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4.9.10 Contractor shall keep a current contact list of Subcontractors
4.10 Owner Rights
4.11 Bonds
4.10.1 All work, whether major or minor must be approved by the Owner first;
the Architect has certification duty but no approval right.
4.10.2 Contractor shall maintain labor harmony, except for non-Project specific
work unrest
4.10.3 Deflective Works: Supervise - accept and reject performance
4.10.4 Corrective work, prior to Substantial Completion; warranty work after
Substantial Completion
4.10.5 Suspend work for Contractor failure at Contractor’s cost
4.10.6 Compel more workers if behind schedule to meet a Recovery Schedule
4.10.7 Hire separate contractors for separate work on a “harmonious” basis
4.10.8 Administration of Contract with Architect’s input/approval
4.10.8.1 Interpret Contract terms, reject work
4.10.8.2 No change without a Change Order signed by Owner
4.10.8.3 Construction Change Directive by Owner without Contractor
consent, disputes resolved by dispute resolution
4.10.9 Owner, assignee has no obligation under Subcontracts until they are
assigned, and they are to be assigned upon notice from Owner
4.10.10 Owner, not Architect, is in charge of the Change Order process
4.10.11 Owner has approval rights over changes in Contractor’s key personnel on
the Project
4.10.12 Pre-approve changes in work force and in Project Superintendent’s of
Contractor and subcontractor
4.11.1 Performance Bond – For benefit of Owner to Guaranty that Project will be
completed for Contract Balance
4.11.2 Payment Bond – For benefit of Subcontractors and Suppliers, the guaranty
that once Owner has made payment to Contractor, the Subcontractors and
Suppliers who worked on the Project will be paid
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4.11.3 More certainty for Owner (or Lender) on capping project costs
4.11.4 Lessens any potential lien filings on Project by Subcontractors- Suppliers
4.11.5 Provides the Owner with better leverage in case of dispute with Contractor
4.11.6 Bond Costs
4.11.6.1 Part of Contractor’s Bid Cost
4.11.6.2 No Extra Costs for both Performance Bond and Payment Bond
– standard to be in same package
4.11.6.3 Contractor’s Bonding Capacity is what is important – No real
costs incurred if adding Project that is still below total bonding
cap imposed by Bond Co.
4.11.6.4 Typically Charges for Payment and Performance Bond for
qualified Contractors – ½ to 1% of construction cost for
Project
4.11.7 Bonding Red Flags
4.11.7.1 Strange Bond Company – Limit issues and denials
4.11.7.2 See Pa. Insurance Department website
4.11.7.3 Contractor “doesn’t do bonded work”
4.11.7.4 Why? Usually financial problems/history
4.11.7.5 Excessive Bond Costs
4.11.7.6 2% or above, Contractor is either a financial risk or is greedy
4.11.7.7 “Individual Surety” – Run. Run away fast.
4.11.7.8 Contractor – “We require our subcontractors to obtain bonds”
4.11.7.9 Added Costs are usually 2 to 6% of each subcontracts costs
4.11.7.10 Does not protect against Subcontractors/Suppliers filing
mechanic’s liens
4.11.7.11 Other “Insurance Products” – available but
4.11.7.12 Do not protect against Subcontractor/Suppliers filing
mechanic’s liens
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4.11.7.13 Note- a Bond is not “Letter of Credit” or “Cash” – merely a
contractual obligation of a supposedly responsible insurance
company to pay for your losses
4.12 Warranty
4.12.1 Assignment to Owner
4.12.2 Starts at Substantial Completion, Final Completion,
4.12.3 Contractor shall enforce the warranties, be responsible for loss if a warranty
item is rejected, and conduct an end of warranty walk through like the one
at Final Completion. Warranty “walk-through” prior to expiration of
contractor warranty
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