Given the obvious roles of the owner, contractor and design professionals, how are risks in a construction project legally allocated? It seems so simple: the owner tells the design professional what they want to build and the design professionals prepare drawings and specifications indicating and illustrating the owner’s desires. The owner then gives the drawings to the contractor who provides a price and a time frame for commencement and completion. What can go wrong? A lot, unfortunately.
To illustrate, consider who bears the risk in the event:
1.)…the contractor builds the building in accordance with the plans and specifications but defects are discovered.
2.)…the shop drawings and product data given to the contractor by the sub-contractors are inconsistent with the plans and specifications prepared by the architect and engineer and materials are installed that neither the owner nor architect approved.
3.)…the sub-contractor provides the contractor a bid which is too low and is based on a misunderstanding, and it is not discovered until construction is underway.
4.)…the contractor commences construction and discovers certain site conditions which will require additional work and a modification of the drawings and will significantly increase the job costs.
5.)…a subcontractor delays work significantly and claims a material or labor shortage.
6.)…the contractor tells the owner that the plans and specifications were ambiguous or did not even address a certain question in the field and the contractor plans to tender to the owner a change-order increasing the job costs.
In the event the parties have not entered into construction agreements which specify who bears the risk of any of the above examples (and the examples can go on and on), then the parties will be in a dispute in the middle of construction. That may delay completion, and possibly result in litigation. Owner-contractor agreements and owner-design professional agreements are instruments for the allocation of risks between the parties involved in a construction project.
The parties should ensure that they understand the risks and allocate them in a rational manner to the party in the most logical or best position to control, manage or avoid the risk completely; or insure the risk or otherwise bear the loss.
Equally, agreements negotiated to allocate risks in an unreasonable or irrational manner, are likely to result in litigation.
In the next and final article, I will discuss provisions in construction agreements which enhance communication and dispute resolution between the parties in the event a problem arises during construction.