Real Risk Management – Read the Contract

Stephen M. Rymal, P.E., Esq.
MDCSystems®
Consulting Engineer

Construction is as timeless as the pyramids. As a result, the most common construction risks have already been identified and allocated in the terms and conditions of standard form contracts. These are published by a multitude of professional associations such as the Construction Management Association of America (CMAA) and the American Institute of Architects (AIA). This article discusses the practical aspects of risk management and how to convert a potential problem to work to your advantage.

By its dynamic and economic nature, construction inherently carries risks for both the contractor and the owner, which are sometimes mutually exclusive. From the contractor’s viewpoint, the risk can be summarized as completing the project in the shortest possible time for less than the contract price, to maximize profits. From the owner’s viewpoint the risk is having the project delivered late or not at all, for more than the contract price, thereby requiring additional financing.

Unfortunately, too many parties enter into a construction contract without reading or understanding the obligations each owes to the other and how the risks have been allocated. The net result is that they wind up engaged in a dispute by using their mutually exclusive misunderstanding of a contract that neither party read nor understood. When they finally do read the contract they merely try to “cherry pick” clauses that only support their position and ignore those to the contrary.

Case in point, I managed a construction project several years ago and the contractor had hired an extremely diligent quality control representative. At the very start of construction, he prepared a matrix listing every specification and standard, such as the American Society of Testing and Materials (ASTM) standards, referenced in the contract. He then set about the task of acquiring copies of them in order to verify compliance when submitting catalog cuts and shop drawings of the materials to be incorporated into the work. A month into this process, he reported that he could only locate about 75 % of the referenced specifications and standards. The remaining 25% were either improperly referenced, outdated, or in direct conflict with the technical specifications themselves with regard to several key elements of the work.

The bottom line is the architectural/engineering (A/E) firm that prepared the technical specifications referenced a series of specifications and standards without checking to see what, if any, relevance they actually possessed to the work being performed. In the above case, the quality control representative effectively minimized the risk to the contractor, and ultimately the government, with regard to complying with the plans and specifications by pointing out the deficiencies in the technical specification. This is an important step that was taken before purchasing and installing material that may later have been claimed to be out of compliance. This particular project was completed on time and within budget, with a minimum number of change orders and no outstanding claims in large measure due to the effectiveness of that matrix because everyone, including the engineers, inspectors, superintendents, and foremen read the contract before raising any new issues with regard to either changed conditions or disputes.

At a recent CMAA meeting, one of the board members mentioned to me that they require all of their construction managers to prepare a matrix summarizing the obligations of each party to the contract as well as a short synopsis of the risk allocation clauses in the contract they administer. Just for starters, the clauses that every party to a construction contract must understand are:

• Price
• Time for completion
• Liquidated damages
• Changes or Changed Conditions
• Differing Site Conditions
• Defects in the specifications and drawings (who is responsible)
• Payment provisions
• Disputes

The procedure of summarizing these risk allocation clauses forces the construction managers to not only read the contract, but also interpret, in their own words, what each clause means and how it operates. Someone recently asked me what my model was when I analyze a claim and I told him, “…when in doubt read the contract.”

Another case that bears on the issue of risk involves the rehabilitation of a lift bridge. The contractor pointed out that the wiring diagrams in the construction drawings didn’t match the wiring in the field. Neither the A/E firm nor the operating engineers were able to design a fix. Compounding the problem was that the more the contractor worked on the bridge the worse the operation became. Eventually, the operating engineers started to wedge the outdated mechanical switches shut with 2 by 4’s, in order to get the bridge to raise and lower. This is a true story. The operating engineers and the A/E blamed the contractor, so the contractor submitted a change order for his engineering time to design a “fix” for the bridge, which I eventually negotiated as no one else had a solution.

Later, I discovered that his “fix” involved digging deep enough into the historical records on the bridge until he found the original sepia wiring diagrams for the electrical panels when the bridge was constructed. He and his assistant, just two workers, simply started re-wiring the bridge back to its original configuration. It turns out that over the course of about one hundred years of repairs the operating engineers had improperly rewired it because they lost the original diagrams. Within a matter of weeks, the bridge was operating properly. The risk involved here was that no one, neither the A/E firm nor the operating engineers took the time to research the archives related to this particular bridge, except for the contractor. The contractor understood the changes clause and notice provisions and promptly submitted his change order to his economic benefit.

MDCSystems® believes that risks are identifiable and manageable. We also believe that they can be turned to your advantage, but only if you recognize how they are allocated in the contract and take the appropriate steps to resolve them before they are turned into claims.