Chapter 13
Construction Problems
Summary:
Various aspects of contract performance are discussed, including inadequate design, unforeseen conditions, changes and modifications, scheduling, suspension of work, project delays, payment and impossibility of performance. This chapter provides specific examples that may cause a suspension of work and discusses several types of delays, including excusable, inexcusable, compensable and concurrent delays. With regard to payment, this Chapter cites the applicable Public Contract Code sections that discuss payment for performance and the ramifications of failure to pay. Three cases are cited with regard to excuses for impossibility of performance.
§ 13.1 Inadequate Design
The most common allegation on public projects is the quality of the plans and specifications. Claims are regularly made regarding errors, omissions, lack of constructability, lack of timely responses to submissions and requests for information, and related A/E services issues. These disputes arise whether the designs are produced and administered by the agency or an outside engineering firm.
The basic rule is that public agencies in California impliedly warrant the quality of plans and specifications. However, the extent of this liability is hotly contested by agencies, both in the case law and in litigation. The principal argument of the agency is that the contractors have full and adequate opportunity to judge the plans and specifications with regard to completeness and accuracy. The contractors reply that they are not licensed or capable of designing these projects and that they have reasonable expectations of completeness and accuracy. Furthermore, if they were to check every possible aspect of every design they bid on, there would not be any time to actually build anything.
In California, the leading cases find the agency liable for defective plans and specifications following the U.S. Supreme Court decision in United States v. Spearin (1918) 248 U.S. 132. The California cases following this rule include Gogo v. Los Angeles County Flood Control Dist. (1941) 45 Cal.App.2d 334; Souza & McCue Constr. Co. v. Superior Court of San Benito County (1962) 57 Cal.2d 508; Wunderlich v. State (1967) 65 Cal.2d 777; Tonkin Constr. Co. v. County of Humboldt (1987) 188 Cal.App.3d 828; and to a large degree, Amelco Electric v. City of Thousand Oaks (2002) 27 Cal.4th 228.
A single case that suggested that the standard of proof for defective plans and specifications required concealment or fraud by the agency is Jasper Construction, Inc. v. Foothill Junior College Dist. (1979) 91 Cal.App.3d 1, a case roundly criticized by commentators, treated as an aberration by most practitioners, and overruled in part by Los Angeles Unified School Dist. v. Great American Ins. Co (2010) 49 Cal.4th 739.
Furthermore, the A/E may be sued by either the public agency, or directly by the contractor for negligence or for breach of its obligation to perform its contractual obligations (where the contractor claims it is a third party beneficiary of the owner-A/E agreement).
In other jurisdictions, the architect and engineer can be held liable to the contractor in tort for both negligent design and breach of implied warranty, even though there is no privity of contract.
§ 13.2 Unforeseen Conditions
In most construction contracts, unforeseen conditions result in excusable delay and additional costs to the contractor. Typically, these contracts define unforeseen subsurface conditions (“differing site conditions”) as: (1) contrary to the geotechnical conditions set forth in the plans and specifications; (2) conditions not customary to the vicinity; or (3) hazardous waste or other conditions.
These unforeseen conditions may include soils, rock, flowing water, undisclosed utilities, or numerous other problems on the jobsite. There are typically immediate notice clauses for these types of problems and the contractor and owner will need to document these conditions and their impacts immediately.
Agreements for public works projects with excavations or trenching that exceed four (4) feet must provide for contractor notice and owner payment for: (1) hazardous waste generated during the project; (2) physical conditions at the site differing from those outlined in the contract; and (3) unknown and unusual physical conditions. The text of the statute (Public Contract Code § 7104) reads as follows:
Any public works contract of a local public entity which involves digging trenches or other excavations that extend deeper than four feet below the surface shall contain a clause which provides the following:
(a) That the contractor shall promptly, and before the following conditions are disturbed, notify the public entity, in writing, of any:
(1) Material that the contractor believes may be material that is hazardous waste, as defined in Section 25117 of the Health and Safety Code, that is required to be removed to a Class I, Class II, or Class III disposal site in accordance with provisions of existing law.
(2) Subsurface or latent physical conditions at the site differing from those indicated.
(3) Unknown physical conditions at the site of any unusual nature, different materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in the contract.
(b) That the public entity shall promptly investigate the conditions, and if it finds that the conditions do materially so differ, or do involve hazardous waste, and cause a decrease or increase in the contractor’s cost of, or the time required for, performance of any part of the work shall issue a change order under the procedures described in the contract.
(c) That, in the event that a dispute arises between the public entity and the contractor whether the conditions materially differ, or involve hazardous waste, or cause a decrease or increase in the contractor’s cost of, or time required for, performance of any part of the work, the contractor shall not be excused from any scheduled completion date provided for by the contract, but shall proceed with all work to be performed under the contract. The contractor shall retain any and all rights provided either by contract or by law which pertain to the resolution of disputes and protests between the contracting parties.
The statute was interpreted and enforced in Condon-Johnson & Associates Inc. v. Sacramento Municipal Utility District (2007) 149 Cal.App.4th 1384. In that case, a general contractor sued a municipal utility district stemming from discovery of subsurface rock substantially harder than what the utility district had indicated in the contract. The utility district argued that a general disclaimer in the specifications of subsurface conditions stated it was the sole responsibility of the contractor to make its own technical assessment of subsurface soil conditions. The trial court excluded the disclaimer from evidence citing Public Contract Code § 7104 and the Third District Court of Appeal upheld the trial court’s ruling. The appellate court further held that § 7104 placed the risk of unknown and unusual subsurface conditions upon the public entity. “To disclaim what is ‘indicated’ runs counter to the requirements of section 7104…that if the subsurface physical conditions materially differ from that indicated in the contract, the public entity shall issue a change order effecting a change in the bid price.”
Unforeseen conditions are the most likely type of claim to be encountered on large civil, highway or marine projects. They can cause millions of dollars in changes and years of delay to major projects.
Every contractor who has filed a claim for Differing Site Conditions has been told: “You had an obligation to thoroughly inspect the site, you should have seen [it] during the site inspection.”
The United States Federal Government inspection clause reads:
Offerors or quoters are urged and expected to inspect the site where services are to be performed and to satisfy themselves regarding all general and local conditions that may affect the cost of contract performance, to the extent that the information is reasonably obtainable. In no event shall failure to inspect the site constitute grounds for a claim after contract award. 48 CFR § 52.237-1.
The current CalTrans version of an inspection clause reads:
2-1.07 JOB SITE AND DOCUMENT EXAMINATION
Examine the job site and bid documents. Notify the Department of apparent errors and patent ambiguities in the plans, specifications, and Bid Item List. Failure to do so may result in rejection of a bid or rescission of an award.
Bid submission is your acknowledgment that you have examined the job site and bid documents and are satisfied with:
1. General and local conditions to be encountered
2. Character, quality, and scope of work to be performed
3. Quantities of materials to be furnished
4. Character, quality, and quantity of surface and subsurface materials or obstacles
5. Requirements of the contract
These types of clauses are intended to discourage contractors from filing claims about things that should be obvious, visible, or easily discoverable during the site inspection. But, does that mean the contractor can REALLY inspect the site? Or truly assess their risks?
Can a contractor ask to drill concrete cores or soil borings? Drone flights? Ground penetrating radar inspections? Or ask meaningful questions about the site or its history? Contractors would generally say, “No, that’s not allowed. We just get to walk around the jobsite.”
But, is that the right answer? Especially where hundreds of millions of dollars of construction and claims might be at risk due to unusual or unexpected conditions?
Sure, the bidding owner should provide all this information, but they rarely do so. When this author was a geotechnical engineer with Dames and Moore (now part of AECOM), this author never got a public or private owner to approve an entire drilling program. Early in the project, funds are scarce.
The agency might also think: “The site is highly remote, or large or restrictive, so any intrusive testing, surveying or site reconnaissance should be “highly discouraged.” But, is that the right answer? Doesn't the agency have a duty to find out what the contractors will be encountering? Generally, yes. But, that does not mean it’s going to get done.
So, what should a contractor consider their risks in order to avoid a catastrophic surprise? These are some tools that a sharp contractor might employ:
1. Google Earth: Yes, this tool can help research past and current conditions and predict shadows and sundown/sunrise at the jobsite. The data base also has environmental data on temperature, rainfall and other environmental data over many years of records. In one case, the contractor did not know there was a downstream dam that could back up water and inundate the project site. Not a good outcome!
2. Reference Documents: If there are soil or geology reports mentioned in the project bidding materials, but not included, the contractor can ask for them. It is common for the bidding agency to include the main geotechnical report, but not the boring logs or the entirety of former or ancillary reports.
3. Governmental Permits: Where permits are mentioned but not provided, they can be a subject of a document request. The terms and conditions of project permits can be just as important as the project specifications. In many cases, the permits trump the specifications, since the government entity’s right of possession is subject to those permit rules. This is also true for environmental permits, such as when bird nesting or fish spawning might restrict construction operations.
4. Drone Flights: Drone flights are generally allowed over most of the United States. The Federal Government prohibits them over National Parks and Military Installations. However, there is no specific reason that a government entity should prohibit pre-bid drone flights. What can you learn? Exact quantities, conditions of roofs and other elevated structures, estimated line of sight between transmission sites, etc. Drone flights must be pre-cleared if closer than five miles from an airport. And be flown by a Certified Drone Pilot (See: FAA B4UFLY). But, they can be incredibly revealing. They might show major deviations in quantities, or the outlines of previous grading or dumping operations. Always ask permission to fly. Nobody wants a drone intruder to appear unexpectedly. In one case, a SCADA design would not work, because the line of sight between control building and the towers was obstructed by a new building. The facilities were blocked by high fences. A drone flight might have established the exact relationships of these pre-existing structures.
5. LIDAR: This total-station approach to surveying makes it relatively easy to check the dimensions of the site, existing buildings and utilities. It also establishes a “ground truth” that the contractor can rely upon. This is especially true in renovation projects where the As-Built drawings may be incorrect or entirely absent.
6. Ground Penetrating Radar: This non-intrusive method can determine where utility lines or gas pipelines might exist. It can determine the edges of foundations and other buried features. This makes estimating and planning far easier.
7. Hydrologic Data: If there is a river or lake, it would make sense to understand the historical low and high water marks, low flow rates, and seasonal flooding, if any. As many contracts give scant financial relief for severe weather, it is important to be realistic about the potential conditions in the creek, river or bay.
8. Dark Sky: This weather service app (and others) can give predictions of rain days, wind speeds, humidity, temperature, extreme weather and tornado/hail warnings that will occur at various stages in the project. However, use the right coordinates: in a recent Sacramento, Calif. project, the contractor used the latitude/longitude of Austin, Texas!
9. Field Density Tests: Although this only tests the surface of the soil, it might be useful in large scale excavation projects.
10. Soil Samples: The top soil properties can be a major issue, especially when establishing new vegetation. There are situations where a “grab” sample of the surficial soils might be invaluable to determine whether they are suitable for planting or severely contaminated with toxins or carcinogenic materials.
11. Interviews with Sister Agencies: This is often discouraged by the bidding agency but can reveal a treasure trove of information about past projects (e.g., was rock encountered?), local requirements, legal quirks, and the reputation for fairness of the bidding agency.
12. Interviews with local residents: While it may seem obvious, the locals know their neighborhood. And may steer a good contractor away from a bad situation.
13. Interviews with prior contractors: They may have valuable information about blow counts, rock encroachments, permit or inspection issues, or the quality of the client’s field organization. However, don’t discuss upcoming bids with other likely bidders because that is likely collusion and has severe anti-trust implications!
14. Litigation Search: Is there a prior lawsuit or regulatory action involving the site? It is a former Superfund Site or has there been previous litigation over site conditions? Or, is the owner prone to go to Court? If so, good to know.
15. Google: Yes, the entire record of human existence, including newspaper articles, TV reports, press releases, professional papers and resident "rants" are now accessible. You never know what might show up searching the vicinity, the project owner or the project itself.
§ 13.3 Changes and Modifications
Construction contracts typically provide for changes by including a “change order” clause. Generally, the owner, architect and contractor must agree on a change order. However, the owner has the right to direct a change in the work without an agreement with the contractor if the change is within the general scope of the contract. The architect alone has the authority to order any minor change in the work. The AIA General Conditions Form A201, Article 7, provides for such authority. Construction contracts also typically include a requirement that all changes be in writing.284 The parties can agree to waive the writing requirement; however, such a waiver will most certainly pose a major problem with regard to documentation if a dispute arises as to a particular change order request.
In addition to change orders, “extras” play a large role in contractors’ performance on public works construction projects. Extra work provisions may be inserted in the contract by the public entity.285 If the work to be performed is extraneous and not related to the original bid or contract, the contractor may have the right to refuse to perform, as beyond the scope of the contract.
If the contractor chooses to perform extra work, it will, of course, seek extra compensation. Public works contracts almost always provide for payment for extra work. Such provision typically requires a contractor to obtain a written extra work order that specifies the amount to be paid for the extra work and is signed by a public agency representative.286 In addition, an extra work provision may be nullified if the contractor can show the public agency fraudulently concealed material facts.287
Numerous other provisions address the actual construction phase of a public works project. For example, the AIA General Conditions Form A201, Article 15, provides a standard provision for a claim for additional costs and time extensions. This provision states the contractor must submit a written estimate of the work prior to commencing with the change.
There are limits to the amount of changes that may be made under various California Statutes (e.g., Public Contract Code § 20455, limiting changes to $25,000, plus 5 percent of the contract amount above $250,000, not to exceed an aggregate of $150,000 for projects under the Improvement Act of 1911.)
§ 13.4 Scheduling
Scheduling is an important aspect of any type of public works project. However, its role in claims and extensions of time in public works contracts is absolutely critical. The contract, and resultant milestones and schedules, provides expected completion dates, and serves as the basis for coordination of the various subcontractors and trades involved. The series of approved and modified schedules, including as-bid, as-impacted, and as-built, are often utilized as the key documentation with regard to disputes over timely performance.
Two types of scheduling methods are used in the construction industry: the critical path method (CPM) and bar charts. The CPM method depicts the flow of time and work. It identifies the critical activities of the project and the duration of each activity, along with critical deadline dates. Bar charts are the more dated form of scheduling. The chart identifies the start and completion dates of particular activities, providing visual clarity. These charts are often prepared for presentation purposes, but are not as useful as the CPM. Various construction phases and activities are identified and organized into these detailed schedules, which are updated as a project progresses, reflecting the contractor’s equipment purchases, and completion or various phases of construction.
§ 13.5 Suspension of Work
A standard provision relating to suspension of work by an owner is set forth in the AIA General Conditions Form A201, Article 14.3. The provision states that the owner may suspend work in whole or in part for any duration of time. An adjustment will be made in the contract amount for any increases in costs caused by the suspension.
The following are a few examples of situations that may amount to a suspension of work:
• The failure of the city to proceed under a contract provision giving it the power to suspend work for an indefinite period amounted to a suspension of work.288
• The city’s failure to provide required construction permits, easements, or rights-of-way required for construction to proceed in an orderly manner was determined to be a suspension of work.289
• The failure to act upon a contractor’s request for information that was critical to the contractor’s performance also amounted to a suspension of work.290
§ 13.6 Delay
Delay may be the fault of the contractor or the public entity, or due to other forces not within either party’s control, such as weather. Regardless, both parties suffer damages as a result of any type of delay.
Typically, a contract will contain a provision specifying that the contractor is entitled to an extension of time if the delay is caused by forces outside its control. Government Code § 53069.85 provides that cities, counties and districts can include a liquidated damages clause in their construction contracts for damages caused by a contractor’s delay.291 A standard provision regarding delays and extensions of time is contained in the AIA General Conditions Form A201, Article 8.3.
California presumes the validity of reasonable liquidated damages clauses. Civil Code § 1671. However, that does not preclude the possibility that under specific circumstances, a particular clause will be found unenforceable as an unreasonable penalty. Purcell v. Schweitzer (2014) 244 Cal.App.4th 969 and Krechuniak v. Noorzoy (2017) 11 Cal.App.5th 713.
Several types of delays merit special discussion. Among the types that most commonly occur are excusable, inexcusable, compensable and concurrent delays. An excusable delay is one that is unforeseeable, beyond the contractor’s control, and not the fault of either party. Examples of excusable delays are Acts of God, strikes, unusually severe weather, and the inability of the contractor to obtain construction materials or fuel (as in the energy crises in 1973 and 1979).
Excusable delays allow the contractor to obtain a time extension to complete the contract without being penalized. However, this type of a delay normally does not entitle the contractor to any damages caused by the delay. If the delay is directly attributable to the contractor, the contractor is at fault and the delay is unexcused. Examples of an inexcusable contractor delay would be failure to order materials on time, inadequate staffing and failure to coordinate subcontractors.
Typically, the liquidated damages clause in the contract will provide the public entity with a measure of assessing its damages caused by the contractor’s unexcused delay. A compensable delay is generally one that is caused by the owner or its agents, such as the architect or engineer. Usually, the contractor will be entitled to an extension of time and has the right to recover damages due to the owner-caused delay. However, contracts vary in their approach to compensable delays, generally attempting to limit the recovery of the contractor, except in extreme circumstances. As previously stated, public entities are limited in their ability to insert no damage for delay clauses in their contracts.
Examples of compensable delays are an owner’s failure to make timely progress payments and issuance of numerous “stop work” and change orders,292 failure to make timely inspections of the property, and failure to furnish materials on a timely basis.
It may be difficult to determine which party is actually responsible for a delay because the delay of one party is intertwined with the delay by the other. In some cases, neither party may be entitled to recover damages from the other, or apportionment may be applied with the responsibility allocated between the parties.
§ 13.7 Cumulative Impact, Disruption and Lost Productivity
The effect of multiple cumulative impacts, changes, delays, accelerations and interferences can cause considerable losses to contractors and their suppliers. While Amelco has eliminated the abandonment theory for the recovery of these losses, the actual proof of these losses through discrete and precise measurement of the impact of these events is still a viable route to recovery.
There are many components of these types of claims, including, as set forth by the Mechanical Contractors Association of America:293 (1) stacking of trades; (2) morale and attitude; (3) reassignment of craft-personnel; (4) crew size inefficiencies; (5) dilution of supervision due to diversion of supervisors to analyze and plan for changes; (6) site access; (7) changes in one trade’s work affecting another trade’s work; (8) control over material flow to work areas; and (9) season and weather changes.
§ 13.8 Prompt Payment
A public works contract typically contains provisions regarding the payment of progress and final payments. In addition, several statutory provisions apply to payments in the context of a public works project. (These Statutes are summarized in Section §15.7).
Under Public Contract Code § 7107, retention payments withheld from payment by a public entity must be made to the original contractor within 60 days after completion of the project and by an original contractor to a subcontractor thereafter (10 days after receipt of funds by the original contractor to a subcontractor.) Failure to release such payments will result in a penalty assessed at the rate of 2 percent per month and reasonable attorney fees.
Since enactment of the statute, public entities and general contractors had occasionally made the argument that any good faith dispute would allow them to withhold 150% of the disputed amount. This practice was severely restricted by East West Bank v. Rio School Dist. (2015) 235 Cal.App.4th 742. The California Supreme Court eventually ruled that the withholding of retention is only permitted for disputes over the retention. United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th.1082.
Business and Professions Code § 7108.5 further establishes a 7-day period for progress payments to subcontractors after receipt of funds by the general contractor. Public Contract Code § 10258 (payment where control is terminated or work abandoned), § 10261 (payments upon contracts, progress payments, eff. Jan. 1, 2023), § 10262 (payment to subcontractors), § 10262.3 (notice of progress payments to contractor), and § 10264 (partial payment for mobilization costs) further regulate payments made to contractors and subcontractors by a state agency.
Public Contract Code § 10262.5, also a “prompt pay statute,” provides that any prime contractor that fails to make a progress payment to a subcontractor within 7 days from receipt of funds by the contractor must pay a penalty at the rate of 2 percent per month, in addition to interest. This statute also calls for prevailing party attorney fees and costs.
Public Contract Code § 20104.50 sets forth strict requirements for prompt payment to local public entities, including up to 30 days for payment of undisputed and properly submitted requests for payment. The State interest rate for undisputed payments that are more than 30 days overdue is otherwise set forth in Code of Civil Procdure § 685.010.
The award of prejudgment interest is normally determined by whether the sum is fixed or can be reasonably calculated. In at least one recent case, the court found that the mere contesting of the liability of a party on a calculated sum was not sufficient to avoid a claim of prejudgment interest. Watson Bowman Acme Corp. v. RGW Construction, Inc. (2016) 2 Cal.App.5th 279.
§ 13.9 Impossibility of Performance
Impossible and impractical specifications are often encountered, especially in contracts governed by state contract law, and in federal defense and energy contracts where the government is constantly pushing the state-of-the-art.
California law provides for an excuse of performance due to impracticality or impossibility of performance.295 In fact, modern cases in California provide for an excuse from performance even when performance is impractical because of excessive and unreasonable difficulty or expense.296
In federal construction law, the excuse of performance principle has been established in cases such as Foster Wheeler Corp. v. United States,297 where a required 19 – 24 month research and development period was clearly longer than the entire 13 month contractual performance period; Dynalectron Corp. (Pacific Div.) v. United States,298 where no contractor could manufacture certain antennas within the specified tolerances without significant waivers of the specification requirements; and Hol-Gar Mfg. Corp. v. United States,299 where no engine of the specified design could meet the performance requirements.
§ 13.10 Pass Through Agreements
Pass through agreements are intended to allow a general contractor to pass along a subcontractor claim, assist in its preparation and share in its analysis, while preserving joint attorney client privilege and protect the general contractor against independent liability beyond the pass through amounts. These agreements are not without risks, as set forth in these cases: Howard Contracting, Inc. v. G.A. MacDonald Construction Co., Inc. (1998) 71 Cal.App.4th 38; Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882; Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp. (2003) 111 Cal.App.4th 1328; and see California Civil Code § 1542 regarding releases.
§ 13.11 Good Faith and Fair Dealing
A major recent federal case has expanded the viability of this cause of action in recent years. In that case, the United States Court of Appeals stated that the federal government and a contractor had a mutual obligation for good faith and fair dealing. Metcalf Constr. Co., Inc. v. United States (Fed. Cir. 2014) 742 F.3d 984. It has particular relevance to California projects, as the Court of Appeals quoted extensively from a number of California cases finding such an obligation exists in all contracts (quoting Racine & Laramie, Ltd., v. Dept. of Parks and Recreation (1992) 11 Cal.App.4th 1026.
§ 13.12 Miscellaneous Claims
The preceding list of claims is far from exhaustive, as the types of claims that may arise are nearly unlimited. Certainly, each of the risks set forth in Chapter 3 may give rise to some type of claim, but the legal basis or nature of those claims are only limited by the universe of statutory and case law authority and the creativity of the claimant’s legal advisors.