11.1 Construction Contracts
Library | Contract Law in Virginia (Virginia CLE) (2019 Ed.) |
11.1 CONSTRUCTION CONTRACTS
11.101 Introduction. Construction contracts are specialized legal documents that govern the relationships between the owner and the general contractor and between the general contractor and subcontractors. While an entire chapter could be dedicated to the topic of construction contracts, this discussion concentrates on a few general principles of construction contract law.
11.102 American Institute of Architects Form Contracts. While there may be some benefits in drafting a construction contract specifically tailored to a project, there are also some distinct advantages to using American Institute of Architects (AIA) preprinted form contracts. The AIA form contracts, which are known as "AIA Contract Documents," aim to balance the interests of all parties involved in a construction project. Although they are state-of-the-art legal documents, they are written in layman's language. They are also designed to be flexible so that modifications to fit individual projects are easily made. 1
AIA Document A101 (Standard Form of Agreement Between Owner and Contractor) is the standard fixed-price construction contract. The latest version was copyrighted in 2017 and reflects practices that are currently standard in the construction industry. It contains basic contractual terms and conditions as well as provisions dealing with plans and specifications, progress payments, and final payment.
AIA Document A101 is intended to be used in conjunction with AIA Document A201 (General Conditions of the Contract for Construction). Document A201 provides for general contract conditions and it also defines,
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in great detail, the primary and secondary relationships associated with a typical construction project. For this reason, it is often found referenced in owner-architect agreements and contractor-subcontractor agreements. Parties may also supplement these AIA form contracts with non-AIA documents, such as supplemental conditions, drawings, specifications, and modifications.
11.103 Provisions Common in Owner-Contractor Contracts.
A. Time Periods. Unless otherwise provided, the contract time is the period of time, including authorized adjustments, allotted in the contract documents for substantial completion of the work. The date of substantial completion is the date the work is certified by the architect or contractor. The contractor is required to proceed as expeditiously as possible in its efforts to achieve substantial completion within the contract time.
The date of commencement of the work is the date established in the agreement and it should not be postponed by the contractor's failure to act. But contracts often provide that the contractor must not prematurely commence operations on the work site in the absence of agreement or instruction by the owner.
B. Change Orders. Most construction contracts permit an owner to unilaterally change a project. A "change order" is the mechanism for changing the requirements of the contract. The right to issue change orders and the terms and conditions under which this may occur is established in the original contract, but, generally speaking, the changes must be reasonable.
C. Mechanics' Liens.
1. In General. The requirements for the filing and enforcement of mechanics' liens are found in the Virginia Code. 2 The enforcement of mechanics' liens is entirely statutory and is therefore beyond the scope of this chapter. The right to file a mechanics' lien, however, does arise under the terms of a construction contract. Claimants are categorized by the party with whom they have contracted in order to determine their priority for payment. A claimant who contracts directly with the owner is a general contractor; a
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claimant who contracts with someone other than the owner is a subcontractor or a sub-subcontractor.
2. Waiver of Mechanics' Liens. A contractor's right to seek a lien may be modified or waived according to the terms of the parties' agreement. Under section 43-3(C) of the Virginia Code, any right to file or enforce a mechanics' lien may be waived in whole or in part at any time by any person entitled to assert such a lien. General contractors and subcontractors, as well as suppliers, can be required by agreement to execute lien waivers, indemnity agreements, or other forms required by the lender, the owner, or the owner's title insurer to ensure an effective waiver of mechanics' liens or other claims against the property arising out of nonpayment of sums owed to the contractors or suppliers.
D. Changed Conditions. One major risk a contractor assumes in performing any substantial project is the soil conditions that will be encountered during excavation. Although there are a number of different analyses and tests that can be performed on the soil in preparation for submitting bid documents, the information received is often misleading or erroneous. As a result, claims arise for increased costs and delays based upon, among other things, suspended work, the need for redesigning the foundation work, or obtaining better soil materials from an off-site source. 3
Despite the frequency of misleading information from soil tests, a contractor is not justified in relying on contract manifestations of the subsurface when relatively modest inquiries might have uncovered differing conditions. 4 However, this duty to make an inspection of the site does not negate the changed condition clause of a contract. 5
Although the term "changed conditions" can refer to any physical condition that the contractor encounters on the project, most changed conditions involve subsurface soil materials. Courts have noted two categories of changed conditions—Type 1 and Type 2 conditions. Type 1 conditions are subsurface conditions at the site that materially differ from those indicated in the contract. Type 2 conditions are unknown physical conditions of an
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unusual nature at the site that materially differ from those ordinarily encountered and generally recognized as inherent in work of the type provided for in the contract. 6
Whether a condition qualifies as "Type 1" depends on whether the owner makes representations in the contract as to the soil conditions the contractor is likely to encounter in the work. Because the owner is held to impliedly warrant the accuracy and correctness of the documents to the contractor, any dispute regarding a Type 1 condition is essentially the same as any other dispute arising out of an alleged error in the contract documents. An owner may include in the contract exculpatory language that purports to shift the liability for errors in the soil information to the contractor, but since most contractors do not have the time or resources to confirm or deny the accuracy of the soil information, these disclaimers are unreasonable and unrealistic.
A Type 2 condition exists if the contract documents are silent as to what the contractor is expected to encounter during excavation, and the contractor discovers conditions it did not expect. In such cases, the courts will look to the type of work being performed, the contractor's experience, and similar factors to determine whether the contractor acted reasonably in arriving at any conclusions regarding soil conditions. 7
Most contract clauses regarding changed conditions require the contractor to provide the owner with written notice within a certain period of time once a changed condition is discovered. If written notice is not provided as required, then the contractor risks losing a claim. 8
E. Liquidated Damages. Liquidated damages are a fixed sum that will be paid to the owner in the event of delay. Liquidated damages clauses usually provide that the contractor is to pay a certain dollar amount for every day that the completion of the contract is extended beyond the stipulated date. 9
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A liquidated damages clause will not be enforced when it is in reality a disguised penalty or when it would create a forfeiture of the contract. There are two major factors that a court will look at in determining whether the clause will be enforced: (i) whether the liquidated damages clause provided for payment that reasonably approximated the probable actual damages and (ii) whether the probable damages were, by their nature, unascertainable with exactness at the time the contract was made. 10 If damages were clearly ascertainable at the time of contracting, then a clause providing for payment in excess of the actual amount may not be enforced. 11
A liquidated damages clause may actually benefit the contractor in many cases, because the owner is not entitled to delay damages in excess of the amount stipulated in the liquidated damages clause even though the owner's actual delay damages may be far greater than the liquidated damages. The Virginia Supreme Court has upheld contract provisions in which a party waives the right to object to a liquidated damages clause as unduly punitive or not reasonably related to actual damages, affirming the principle that a party may enter into an agreement in which he or she waives significant rights. 12
F. Performance and Payment Bonds.
1. In General. Under AIA Document A201, General Conditions of the Contract for Construction, the owner has the right to require the contractor to...
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