Oles Morrison’s attorneys Douglas Oles and Alix Town have once again been published in the International Comparative Legal Guide: Construction & Engineering Law 2021, the Eighth Edition.
This legal guide is released annually, and includes a practical cross-border insight into construction and engineering law in various countries. The USA section covers common issues in construction and engineering laws and regulations —including making construction projects, supervising construction contracts, and dispute resolution — in 20 jurisdictions.
1. Making Construction Projects
1.1 What are the standard types of construction contract in your jurisdiction? Do you have: (i) any contracts which place both design and construction obligations upon contractors; (ii) any forms of design-only contract; and/or (iii) any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and engineering contracts.)
With 50 separate states, public and private entities in the United States utilize a wide variety of contract types. Before the 1980s, there was a general preference for fixed-price design-bid-build contracts, based on an employer advertising a fully completed set of design documents. Time-and-materials arrangements have also long been used, especially where it is difficult to estimate a fixed price or when construction must begin before there is time to complete a design. In recent decades, however, statutory changes have facilitated a much increased use of design-build contracting and its variations such as engineer-procure-construct (EPC) contracting. The evolving technologies used in construction have led to an increased use of design-build contracting in specialty trades. Although public-private partnerships (P3) and Integrated Project Delivery (IPD) have had a relatively slow start in the United States, their use seems to be increasing gradually. Nonetheless, many segments of the U.S. construction industry remain largely unfamiliar with those project delivery systems. On IPD, see Bruner & O’Connor on Constr. Law, §6.18.10 et seq. (2020).
There is no standard form of construction agreement in the United States. The contract forms provided by the International Federation of Consulting Engineers (FIDIC) are rarely if ever used. Federal construction projects are generally governed by the Federal Acquisition Regulation (FAR), a book containing numerous clauses mandated on various types of jobs. On local government projects and private construction, the A-201 General Conditions and other forms published by the American Institute of Architects (AIA) are probably the most widely used. Other well-known suites of contract forms are published by ConsensusDocs, the Engineers Joint Contract Documents Committee (EJCDC) and the Design-Build Institute of America (DBIA). All of these forms make an effort to achieve a degree of balance between the various parties that typically participate in a complex construction project, although that balance can easily be lost when the forms are heavily modified to favour the interests of a particular party. In the U.S., construction management contracting is typically handled by a construction manager. Some of them (“at risk”) also hold direct agreements with trade contractors, while others (“not at risk”) merely ask as advisors to an employer (usually referred to as the “owner” in the U.S.).
1.2 How prevalent is collaborative contracting (e.g. alliance contracting and partnering) in your jurisdiction? To the extent applicable, what forms of collaborative contracts are commonly used?
On design-build or P3 projects, contractors commonly partner with design firms, either through a joint venture agreement or conventional subcontracting. On large civil projects, it is also common for two or more general contractors to bid for the work together, either as a temporary alliance team or a formal joint venture entity. See, e.g., ConsensusDocs 298.
1.3 What industry standard forms of construction contract are most commonly used in your jurisdiction?
See answer to question 1.1 above.
1.4 Are there any standard forms of construction contract that are used on projects involving public works?
The Federal Acquisition Regulation (FAR) is perhaps the most standardized contract for public works in the United States. Any public works project for the federal government is required to use FAR clauses. At the state level, many states have adopted procurement codes that establish how public works contracts are awarded but leave the forms of the public works contracts up to the individual agency or municipality. Therefore, the form for public works contracts can vary widely within a state and between states.
1.5 What (if any) legal requirements are there to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations are usually required)? Are there any mandatory law requirements which need to be reflected in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?
Although U.S. states are generally common law jurisdictions, some of them (e.g., California and Louisiana) have adopted civil codes that include many principles applicable to construction law. Purchase of equipment and other goods is typically governed by the Uniform Commercial Code (UCC), which provides rules for sales, security interests, warranties and remedies when those terms are not specified by contract. Where a state lacks applicable case law on a particular subject, its courts often look to federal case law or to decisions in neighbouring states. Under U.S. common law, a binding contract typically requires an offer, acceptance, and economic consideration. Consideration can be very minimal (including the mere exchange of reciprocal obligations). Most requests for proposals are written as invitations for tenders, so that they do not constitute offers in them-selves. Employers typically treat the tenders as offers and try to reserve broad discretion in deciding which one (if any) to accept. The individual states have various requirements as to which kinds of contract must be in writing to be valid (so-called “statutes of frauds”). Some terms can be implied from industry practice or from previous dealings between the parties. On some facts, acceptance may be inferred where an employer allows work to proceed without a signed agreement. However, if the evidence indicates no “meeting of the minds” with regard to essential contract terms, a binding contract is unlikely to exist. Even without a written agreement, a contractor may have an equitable right to payment if it performs work in good-faith reliance on what it reasonably understood as an employer’s offer to contract (e.g., implied contract, quasi-contract, quantum meruit, and equitable estoppel).
1.6 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.
Enforceability of agreements is likely to depend more on their substance than on their form. A letter of intent may be unenforceable if it is nothing more than an agreement to agree. It is not uncommon, however, for parties to enter what they intend as a binding “memorandum of understanding” or “memorandum of agreement”, while leaving details for later negotiation. It is also common for employers to issue a limited notice to proceed or execute a limited-scope agreement that allows certain preliminary and/or long-lead activities to begin while the parties continue negotiating to price the balance of the planned project.
1.7 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer’s liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors’ all-risk insurance?
Applicable statutes generally require contractors to hold a licence in the state where work is done, and such licences usually mandate some level of insurance. There are many insurance products and insurance approaches available. Employers typically require contractors to provide coverage for general liability and excess liability, which covers at least personal injury, death and property damage. Applicable laws also typically require insurance for losses caused by automobiles and for workers’ compensation. Contracts including design responsibility are likely to require professional liability insurance. It is also common to require insurance against environmental pollution and coverage for completed operations. Employers often procure builder’s risk or all-risk insurance covering damage to the project as it is constructed. On some jobs, prime contractors may purchase insurance against defaults by lower-tier contractors. To avoid the cost associated with multiple tiers of contractors procuring overlapping policies, it is common for projects to have a single consolidated Contractor Controlled Insurance Program (CCIP) or Owner Controlled Insurance Program (OCIP).
1.8 Are there any statutory requirements in relation to construction contracts in terms of: (a) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (b) tax (payment of income tax of employees); and/or (c) health and safety?
(a) In the U.S., labour relations between workers and employers are primarily governed by federal statutes and regulations, creating substantial uniformity between the states. The Immigration Reform and Control Act of 1986 prohibits the knowing hire of workers who lack legal status to work in the U.S. Other laws prohibit discrimination, such as Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. Minimum wage rates are established by the Wage Rates Requirements (formerly under the Davis-Bacon Act) and other laws, as are rules for paying premiums for overtime labour. Separate union agreements often govern the bene-fits that must be paid to construction workers or to their labour unions.
(b) In the U.S., most taxes are assessed either by the federal government or by the individual states. Contractors must usually withhold sums from worker compensation to assure payment of applicable taxes and employee benefits. State tax rates vary considerably. There is no federal sales tax or VAT, but most states charge sales and excise taxes that apply to many construction projects. The federal government charges income tax on individuals, as do most state governments. The federal government also charges a corporate income tax, although it was substantially reduced in 2018. The federal government also charges taxes to support Social Security (retirement), Medicare (medical care for seniors), and unemployment insurance.
(c) Health and safety are heavily regulated, both at a federal and state level. The federal Occupational Safety and Health Act (OSHA) and its implementing regulations are probably the best-known. Individual states have their own occupational safety laws, and the federal Jones Act has specific remedies for injuries occurring during work on a ship or barge.
1.9 Are there any codes, regulations and/or other statutory requirements in relation to building and fire safety which apply to construction contracts?
Each of the 50 states and the District of Columbia have adopted the International Building Code. The International Fire Code and the International Energy Conservation Code have also been widely adopted. However, each jurisdiction has the authority to make alterations to the codes as it deems appropriate. There are several websites that include a compendium of the codes for each state, including the one found at https://www.buildings-guide.com/blog/resources-building-codes-state. Federal public works projects must comply with these local codes in addition to any special requirements that the federal government may have for the project.
1.10 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability period is complete?
U.S. employers are generally entitled to withhold a portion of a contractor’s price as security for final completion of a construction project. Such withholding must be authorised by contract, and it is typically in the range of 5% to 10% of the contract price. Many contracts provide that the percentage of retention declines after the work is at least 50% complete, and it is often possible for the contractor to obtain release of the retention balance by posting a special bond as substitute security for the employer. It is not common to allow retention after final completion, e.g., as security for performance of post-completion warranty claims that have not yet arisen. For specialty contractors performing early stages of work (e.g., foundations, shoring, or ground improvement), it is common to provide for release of their retention when their work is done, rather than holding back money until a much later date when the rest of the project is completed.
1.11 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee the contractor’s performance? Are there any restrictions on the nature of such bonds? Are there any grounds on which a call on such bonds may be restrained (e.g. by interim injunction); and, if so, how often is such relief generally granted in your jurisdiction? Would such bonds typically provide for payment on demand (without pre-condition) or only upon default of the contractor?
Performance bonds are commonly used in the United States, and most contractors have established relationships with surety companies that provide bonding when necessary. Banks are not typically involved in providing performance bonds, and letters of credit are much less common as project security than in many other countries. U.S. employers also typically require payment bonds (like the “Miller Act” bonds on federal contracts and the similar “little Miller Act” bonds on state contracts). Forms of bond are generally not prescribed by law, although some forms (like the ones published by the AIA) are widely used.
1.12 Is it permissible/common for there to be company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such guarantees?
When the successful tenderer is a new joint venture entity or a specially formed project company, it is not unusual for the employer to require guarantees from parent companies, and U.S. law will not substantially restrict the validity of such guarantees. On most projects, however, the employer relies on bonds and retention as the principal guarantees of contractor performance. Parent guarantees are particularly likely on contracts (e.g., P3) with long-term project operating responsibilities.
1.13 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that, until they have been paid, they retain title and the right to remove goods and materials supplied from the site?
If a commercial contract is silent as to ownership of delivered materials and equipment, the contractor’s ownership rights in those “goods” are likely to be governed by the Uniform Commercial Code, which includes a mechanism for establishing security interests in delivered products until the employer pays for them. On most commercial projects, however, contracts provide that title passes upon installation (or even earlier, when goods are delivered and paid for). Contracts often provide that employers may take over the materials purchased by a defaulting contractor as needed to complete the job. The contractor’s right to payment is generally protected by statutory lien rights in the improved property, or by some form of payment bond.
2. Supervising Construction Contracts
2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third party (e.g. an engineer)? Does any such third party have a duty to act impartially between the contractor and the employer? If so, what is the nature of such duty (e.g. is it absolute or qualified)? What (if any) recourse does a party to a construction contract have in the event that the third party breaches such duty?
Relatively few employers have sufficient in-house experience to manage a complex construction project with their own personnel. Therefore, they often hire a construction manager for that purpose. Sometimes, a more experienced agency like the U.S. Army Corps of Engineers will manage work for other agencies that have less experience. Construction managers typically do not owe a duty to act impartially between employer and contractor. Where an employer retains its architect to perform this role, however, the architect may be bound to act impartially by contract or by Rule 2.4 of the National Council of Architectural Boards (or similar provisions in state codes of professional responsibility for architects).
2.2 Are employers free to provide in the contract that they will pay the contractor when they, the employer, have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when paid” clause?
Subcontracts often provide that the employer’s prime contract payments are a “condition precedent” for lower-tier contractors getting paid (“pay if paid”), and it is also common to see clauses indicating that lower-tier contractors should wait to get paid after the prime contractor is paid (“pay when paid”). The enforceability of “pay if paid” clauses was challenged success-fully in California on the theory that it conflicted with statutory lien rights. Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882, 938 P.2d 372, 64 Cal.Rptr.2d 578 (1997). Many state courts have not yet specifically addressed this issue, but they are likely to hold that a subcontractor may at least be required to wait for a reasonable time while the prime contractor pursues payment from the employer on the subcontractor’s behalf. In federal contracts, FAR 52.232.27 generally requires prime contractors to pass progress payments through to subcontractors within seven days after receiving money from the government. State governments generally have similar “prompt payment” statutes for their own projects.
2.3 Are the parties free to agree in advance a fixed sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre-estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss likely to be suffered by the employer? Will the courts in your jurisdiction ever look to revise an agreed rate of liquidated damages; and, if so, in what circumstances?
Liquidated damages are widely used on U.S. projects to deter-mine the price that a contractor will pay for unexcused delays in completing its work, especially where it will be difficult to fore-cast the employer’s resulting financial damages. When fore-seeable delay costs are unusually high (e.g., from high-revenue- producing facilities like power plants and casinos), liquidated delay damages are also used to cap monetary liability for delay because it would be difficult to attract fixed-price tenders without such limitations. Employers will generally be unable to enforce liquidated damages that are held to be a penalty, i.e. that do not represent a reasonable forecast of fair compensation for anticipated delay-related costs. The reasonableness of liquidated damages is typically determined as of the time of contracting, rather than later when a breach occurs. Liquidated damages are usually not recoverable by an employer who has caused concur-rent delays during the time period at issue. Liquidated damages are also used to determine contractor liability for other types of breaches. On power plants, for example, liquidated damages are typically used to limit liability based on failure to achieve key performance guarantees such as heat rate and overall power output. When a prime contract fixes the amount(s) of monetary damages for delay or for some other breach, those damage rates typically preclude a separate claim for “actual” damages arising from the same breach.
3. Common Issues on Construction Contracts
3.1 Is the employer entitled to vary the works to be performed under the contract? Is there any limit on that right?
Almost every construction contract contains language giving the employer a right to increase or decrease the contractor’s scope of work by issuing a written variation, normally called a “change order” in the U.S. Where the parties cannot agree on such a variation, employers often reserve a right to issue a unilateral directive to perform the variation. There are, however, normally some limits on this power. If it fundamentally changes the nature or scope of work, it may be treated as a “cardinal change”, i.e. essentially a breach of contract by the employer. A major deletion may also be treated as a partial termination for convenience rather than a deductive change, which may affect the mechanism used to price the adjustment. Variations normally have to be exercised in good faith, and an employer may be constrained from inviting tenders on a broad scope of work and later using deductive changes to remove only the easiest or most profitable portions of the scope.
3.2 Can work be omitted from the contract? If it is omitted, can the employer carry out the omitted work himself or procure a third party to perform it?
Where an item of work is unintentionally omitted from a contract (e.g., a “scope gap”), employers may typically add it by issuing a variation (see question 3.1 above). Alternatively, the employer may generally perform the omitted work with its own forces or with another prime contractor. On power plants and other major infra-structure, it is common for employers to supply some of the major long-lead equipment themselves, in part to expedite the schedule and also to avoid paying mark-ups to the installing contractor. In some cases, union agreements may restrict the ability of the employer to use its own labour on site.
3.3 Are there terms which will/can be implied into a construction contract (e.g. a fitness for purpose obligation, or duty to act in good faith)?
In the U.S., every contract party owes an implied duty of good faith and fair dealing. As a corollary to this duty, parties are typically held to owe an implied duty that they will not hinder or delay each other.
An employer who provides plans and specifications for use in construction impliedly warrants that they are suitable for use, and employers are typically held responsible for errors and omissions in their contract documents unless the contractor assumes responsibility for reviewing and completing the design as a design-builder (and even in that case the contractor may be able to place some degree of reliance on the employer’s partial design and/or site information). Many courts have held that an employer owes an implied duty to disclose any non-public “superior knowledge” about the site or the project that a court finds should have been disclosed to the contractor. When furnishing materials or equipment for a construction project, the seller typically owes implied duties that the goods will be of “merchantable” quality and that they will be reasonably fit for their intended purposes. See U.C.C. §2-314, 315. Such implied warranties may, however, effectively be disclaimed by contract. State statutes may provide that home builders owe an implied duty that the resulting residences meet certain standards for “habitability”. In construction service agreements, contractors are generally held to an implied duty that they will perform in a “good and workmanlike” manner. And in design contracts, architects and engineers may be held to an implied obligation to perform to the “prevailing standard” established for similar services in the area where the work is done. In multi-prime contracts, employers may owe an implied duty to coordinate their various prime contracts, and prime contractors will probably be held to an implied duty to coordinate their various subcontractors and suppliers.
3.4 If the contractor is delayed by two concurrent events, one the fault of the contractor and one the fault or risk of the employer, is the contractor entitled to: (a) an extension of time; and/or (b) the costs arising from that concurrent delay?
If the delays are truly concurrent and cannot be segregated, the most common approach is that neither party may recover monetary delay damages from the other party during the period when both of them were independently causing delay. In some cases, however, courts and arbitrators will make an effort to apportion delay costs between the two parties. If a party can show that it slowed parts of its work after realizing that the job was already being delayed by the other party, it may overcome the concurrent delay defense.
3.5 Is there a statutory time limit beyond which the parties to a construction contract may no longer bring claims against each other? How long is that period and when does time start to run?
State laws typically include a “statute of repose”, setting the number of years in which a construction-related claim must accrue (i.e. the time in which they must generally be discovered). After a claim has accrued, states have separate statutes of limitations that define the number of years in which the discovered claim must be filed (in court or arbitration).
3.6 What is the general approach of the courts in your jurisdiction to contractual time limits to bringing claims under a construction contract and requirements as to the form and substance of notices? Are such provisions generally upheld?
Some construction contracts and agreements with insurers or sureties will specify shorter time limits for making claims than the periods allowed under state statutes. Many construction contracts specify that contractor claims need to be asserted before accepting final payment from the employer. Courts are likely to uphold these shortened filing times as long as the contractor has a reasonable time to bring the claim. Most jurisdictions apply a reasonable notice standard to the form and substance of notices without requiring strict compliance with the notice requirements of the contract. A few states (including Washington), however, require strict compliance in both form and timing of contract notices.
3.7 Which party usually bears the risk of unforeseen ground conditions under construction contracts in your jurisdiction?
Most U.S. commercial construction contracts assign the risk of unforeseen subsurface conditions to the employer, assuming that the employer normally has more time and opportunity to study the ground that will be excavated. This is typically handled by a Differing Site Conditions clause. See, e.g., FAR 52.236-2. Such clauses typically allow compensation if a contractor encounters latent site conditions that differ materially from those indicated in the contract documents (“type 1”) or latent conditions of an unusual nature that would not normally be expected at the site (“type 2”). Contractors must usually give prompt notice of such conditions and should take reasonable steps to mitigate their impacts. Contractor rights to claim Differing Site Conditions may be limited if the contractor is paid to conduct its own independent pre-bid investigation of subsurface conditions or if a particular contractor had knowledge of the condition based on prior work at the site.
3.8 Which party usually bears the risk of a change in law affecting the completion of the works under construction contracts in your jurisdiction?
The risk of unforeseen post-tender changes in laws, regulations or building codes is often allocated by contract. The AIA General Conditions typically assign responsibility to the employer, except for legal changes that were already known or foreseeable when tenders were submitted. This issue has become a source of much dispute since state laws and decrees imposed major temporary restrictions on construction during the COVID-19 pandemic that began in 2020.
3.9 Which party usually owns the intellectual property in relation to the design and operation of the property?
Many contracts treat project-specific design as “work for hire” that belongs to the employer. Absent a contract clause to the contrary, an architect probably has copyright protection for its plans, drawings and other design work product as stated in the Architectural Works Copyright Protection Act of 1990. In negotiated contracts, designers often retain ownership but grant a royalty-free perpetual licence to the employer and its successors for use on the project site.
3.10 Is the contractor ever entitled to suspend works?
Under U.S. common law, contractors generally have a right to suspend based on an uncured mater