This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
A contractor’s first and foremost responsibility when taking on a construction project is to deliver a defect-free product in a safe and professional manner. In fact, the general conditions of most contracts require it.
In the American Institute of Architects’ AIA-2017 "General Conditions of the Contract for Construction," contractors are obligated to perform their work in such a manner so that it is “free from defects.” As part of the "ConsensusDocs 200 Standard Agreement and General Conditions Between Owner and Constructor (Lump Sum Price)," contractors’ work must be “free from defective workmanship and materials.”
Obviously, the first line of defense against a defective work claim is to produce a quality product, but the issue of defects is not that simple. For general contractors, a subcontractor can be the source of a defect that might not be discovered until years after the project is complete. For subcontractors, other trades could damage their work.
So, how should contractors prepare to defend themselves in case such a claim comes their way? Here are several tips from legal experts:
Review construction documents
Contractors can head off potential future defect issues by examining the plans for constructability and other issues before beginning work, said attorney Carol Sigmond, chair of the construction law practice at Porzio Bromberg & Newman P.C.
Check, for example, that the material will work with the design — i.e. the architect might have specified glass that is going to shatter because the curve of the design is too great or metal that won’t bend as far as the plans show, she said.
“You need to be sure you have buildable designs,” Sigmond said. “You really need to study the job before you take it. That’s just what good contractors do.”
A look at the schedule is important as well, she said, because the last thing contractors want is to be stepping over each other trying to get their work done. That just leaves the door open for one trade to damage another’s work.
“All of that should be coordinated with the GC,” she said.
Document and organize
As the work progresses on a construction project, said attorney Peter Hahn, a partner at Benesch, Friedlander, Coplan & Aronoff LLP, it’s important to have “very talented” project managers tracking the work to not only ensure quality but to make sure that all companies on the project are in compliance with their contracts and scopes of work. Those managers should be in the habit of documenting their activity on those projects as well.
“Contractors who get in a very good habit of documenting a project — taking pictures, taking videos, keeping the owner informed through emails, updating the project [via daily reports], keeping subcontractors informed in writing about what’s going on, documenting issues that come up — tend to find these defect issues faster and get on top of them quicker,” he said.
This also helps establish a good rapport with the owner, who is more likely to give the contractor a bit of leeway in being able to fix defects rather than rushing to punitive measures, Hahn said.
Another benefit of proper documentation, Hahn said, is that sometimes defects arise after the project is complete. A solid paper trail helps determine the nature of the defect, who caused it and what the solution should be.
Subcontractors also should maintain detailed records of damages to their work so that they can recoup the money to fix it from the party at fault, said attorney Marion Hack, a partner at Troutman Pepper Hamilton Sanders.
“If you claim damage to your work,” she said, “you have got to make sure you promptly report it as a back charge to the owner or to whomever is responsible. I see a lot of contractors lose the opportunity to recover money because they have not properly documented the back charge.”
If there is not proper documentation and the matter of a defect goes to court, arbiter or mediator, multiple subcontractors and suppliers — even those that had nothing to do with the work in question — could be pulled into the process to determine how the work was damaged and who is ultimately responsible, Hahn said.
The tools to document work, damage and back charges, Hack said, are widely available.
There are easy-to-use project management programs for contractors, she said, but they won’t do any good if the project team does not take advantage of them and demand that their staff use them on a regular basis.
Make sure you have good insurance
General contractors and their subcontractors should secure an insurance policy that will defend against defect claims, Hack said.
The first thing that contractors always have to make sure they have is a very solid insurance program because, usually, defects involve insurance claims, she said. “The key is to make sure you're covered because, if you're sued, then the attorney is paid for by the insurance company. That's a layer of protection that every contractor should have.”
While it’s true that in certain situations, an insurance policy won’t cover defects, Hack said, the insurance company’s duty to defend is typically broad.
“If you get brought into a lawsuit, you're still going to be defended by your insurance company,” she said. “They'll work out who's going to end up paying for the ultimate damage.”
Whether defective work is covered under a commercial general liability policy, said Hahn, largely depends on the state.
Recently, the Michigan Supreme Court ruled that "unintentionally" faulty work was considered an accident and a valid claim under a subcontractor’s commercial general liability policy.
When general contractors hire subcontractors, Hack said, it’s very important that they insist that those subcontractors maintain policy limits high enough to cover the damages that they might incur on the project.
If, for example, the subcontractor causes $4 million in damages but only has $1 million of coverage, the general contractor will likely be responsible for the other $3 million, she said.
“That’s definitely something that I’ve seen happen numerous times,” Hack said. “The [subcontractor] is underinsured, and the [general contractor] is stuck holding the bill.”
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