Global supply-chain delays and shortages have had an impact on construction contracts in terms of enforceability and risk, and have increased the likelihood of litigation to settle differences between parties, as well as the need to negotiate contracts that anticipate and minimize potential disputes.
“The allocation of risk is paramount to [achieving] the best possible outcome,” stated David Vanderhider, a Partner in the San Antonio office of Dykema Gossett, a Detroit-based national law firm with a substantial construction litigation practice.
During an October 26 webinar that explored the legal considerations of supply-chain impacts on contracts, Vanderhider was joined by two Partners from Dykema Gossett’s Chicago office: Steven Mroczkowski, who is Co-leader of the firm’s Construction Group; and Melanie Chico, Asset Practice Group Leader.
Chico predicted that supply-chain problems, including those related to costs and labor, are likely to spill into 2023. To which Vanderhider followed that earlier attention to planning will be needed to prepare for delays and cost overruns. Mroczkowksi added that collaboration is the key to allocating risk fairly, and he’s been seeing fewer take-it-or-leave-it clauses on contracts. But he also noted that “there’s no one-size-fits-all” solution.
Contractual risk and reward
The bulk of the webinar was taken up with the partners discussing different contract clauses. For example, Mroczkowski has seen an uptick in litigation over the applicability of force majeure, which is intended to excuse nonperformance following a particular event. (This is commonly known as the “Act of God” provision.) Such clauses are enforceable when the event is beyond the reasonable control of the party. And what is often being litigated, he said, is whether the affected party took sufficient steps to reduce its risk.
Mroczkowski cautioned that force majeure can vary by jurisdiction and how a project’s financing is structured, which is why he advises clients to customize the language of their contracts to the realities of the given project. “Sometimes, risk allocation boils down to an amendment in a contract,” observed Chico.
Another growing area of dispute, the partners said, is a contract’s Notice requirement, which spells out when a party is entitled to additional compensation or time. Chico said that too many notice clauses are loosely drawn up, and lack specificity when it comes to who, what, when, and why.
Indeed, the partners agreed that the precision of a particular clause’s language usually determines each party’s level of protection in a contract, especially at a time when outside forces that affect contractual agreements are in flux.
Litigate or arbitrate
![Contracts are still being written too loosely](/sites/default/files/inline-images/construction_contract_agreement_template1_1.jpg)
During the webinar, the partners touched on suspension and termination provisions, limitation of liability clauses, waivers for consequential damages (which owners are generally interested in), safety requirements, and insurance requirements. (Vanderhider said that insurance policies covering errors and omissions/professional liability “are trending,” and revolve around notice provisions.)
He said he’s been seeing contracts with more provisions that allow owners to withhold payments, with a notorious change in emphasis from “pay when paid” to “pay if paid,” which shifts more risk onto subcontractors. Chico added there are options “to be creative here,” such as payment clauses that kick in or are capped at certain thresholds, are limited to certain building materials, are tied to index pricing, or offer early payment for supply and storage actions.
The partners also took some time to debate how best to resolve disputes in general.
Vanderhider typically favors litigation, claiming that arbitration doesn’t always save time or money, and can place limits on the presentation of evidence and witnesses. “Many of the more common contract forms don’t reflect the reality of today’s economic climate,” he asserted. But Vanderhider also conceded that arbitration makes it easier for parties to keep evidence private
Chico, on the other hand, prefers arbitration, “mostly because it’s faster” than letting a lawsuit play out. She and Vanderhider agreed that dispute clauses in contracts are most effective when they are consistent throughout the construction chain. Mroczkowski recommended, too, that contracts include a provision mandating some level of arbitration so as not to halt the project while the parties try to resolve differences.
In conclusion, Mroczkowski cited four takeaways for contractual risk mitigation:
•Focus on your priorities
•Be proactive anticipating supply-chain impacts
•Ensure consistency in certain key contract terms
•Ensure compliance with local laws.
Related Stories
Senior Living Design | Jan 5, 2022
Top Senior Living Facility Design and Construction Firms
Perkins Eastman, Kimley-Horn, WSP USA, Whiting-Turner Contracting Co., and Ryan Companies US top BD+C's rankings of the nation's largest senior living sector architecture, engineering, and construction firms, as reported in the 2021 Giants 400 Report.
Giants 400 | Jan 3, 2022
2021 Government Sector Giants: Top architecture, engineering, and construction firms in the U.S. government buildings sector
Stantec, Jacobs, Turner Construction, and Hensel Phelps top BD+C's rankings of the nation's largest government sector architecture, engineering, and construction firms, as reported in the 2021 Giants 400 Report.
Urban Planning | Dec 15, 2021
EV is the bridge to transit’s AV revolution—and now is the time to start building it
Thinking holistically about a technology-enabled customer experience will make transit a mode of choice for more people.
Sports and Recreational Facilities | Dec 15, 2021
Trends in sports stadium construction, with Turner Construction's Dewey Newton
Turner Construction's Dewey Newton discusses trends in sports stadium renovation and construction with BD+C's John Caulfield. Newton is a Senior Vice President who heads up Turner Construction’s Sports Group.
Healthcare Facilities | Dec 15, 2021
COVID-19 has altered the speed and design of healthcare projects, perhaps irrevocably
Healthcare clients want their projects up and running quicker, a task made more complicated by the shortage of skilled labor in many markets.
Healthcare Facilities | Dec 15, 2021
MEP design considerations for rural hospitals
Rural hospitals present unique opportunities and challenges for healthcare facility operators. Oftentimes, the infrastructure and building systems have not been updated for years and require significant improvements in order to meet today’s modern medical demands. Additionally, as these smaller, more remote hospitals are acquired by larger regional and national healthcare systems, the first step by new ownership is often to update and rehabilitate the building. But how can this be done thoughtfully, economically, and efficiently in ways that allow the engineering and facility staff to adapt to the changes? And how can the updates accurately reflect the specific needs of rural communities and the afflictions with which these areas most commonly face?
Giants 400 | Dec 5, 2021
2021 Justice Facility Sector Giants: Top architecture, engineering, and construction firms in the U.S. justice facility/public safety sector
Turner Construction, DLR Group, AECOM, and Stantec top BD+C's rankings of the nation's largest architecture, engineering, and construction firms for justice facility/public safety buildings work, including correctional facilities, fire stations, jails, police stations, and prisons, as reported in the 2021 Giants 400 Report.
Giants 400 | Dec 3, 2021
2021 Hotel Sector Giants: Top architecture, engineering, and construction firms in the U.S. hospitality sector
Gensler, Jacobs, Suffolk Construction, and WATG top BD+C's rankings of the nation's largest hotel sector architecture, engineering, and construction firms, as reported in the 2021 Giants 400 Report.
Giants 400 | Nov 20, 2021
2021 Parking Structure Giants: Top architecture, engineering, and construction firms in the U.S. parking structure sector
PGAL, PCL Construction, and Wiss, Janney, Elstner Associates top BD+C's rankings of the nation's largest parking structure sector architecture, engineering, and construction firms, as reported in the 2021 Giants 400 Report.
Giants 400 | Nov 20, 2021
Top 10 Integrated Project Delivery (IPD) Construction Firms for 2021
Gilbane, BartonMalow, Whiting-Turner, and Hensel Phelps head the rankings of the nation's largest integrated project delivery (IPD) construction firms for buildings construction work, according to BD+C's 2021 Giants 400 Report.