Contract Risk Management for Airport Agreements (2016)

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8 cases, it is an important adjunct to the professional liability policy. A CGL policy checklist should: 1. Ensure that coverage limits (per occurrence and aggregate) are commensurate with project val- ue and risk. 2. Evaluate whether the Completed Operations coverage is necessary, and if so, in what amount and duration. 3. Evaluate whether excess coverage through an umbrella policy is necessary, dependent also on project value and risk. 4. Ensure that the airport owner is identified as an “Additional Insured” on a primary and noncon- tributory basis under the policy, thus having direct rights of action against the carrier. B. Construction Agreements Construction services agreements range from traditional design–bid–build delivery with a general contractor, design–build with an integrated design and construction team, or construction management at risk or agency. Regardless of the delivery method, most construction agreements are supported by a similar set of “general conditions” that provide the basic legal framework for the contractual relation- ship. The base contract will commonly spell out the scope, schedule, and price, and the general condi- tions will outline all key terms governing the rela- tionship itself. For example, the industry archetype construction forms, issued by the American Institute of Architects (AIA), use the same A201 General Conditions of Contract, or similar standard terms, to support the various construction contracts for design–bid–build, design–build, and construction management. The salient contractual terms that relate to risk are found in these general conditions. As with professional services agreements (previ- ously discussed in Section A), the primary risk asso- ciated with construction services agreements is ensuring the timely and satisfactory performance of work and managing change. The majority of claims in the construction sector arise directly from these three sources, all of which create risk of escalated costs to the airport, impacts to operations, and endangerment to the safety of the traveling public. A comprehensive set of general conditions, backed by insurance and bonds, can be customized to each project to ensure maximum coverage for the pri- mary risks. Identification of Risk 1. Standard of Care/Quality of Work.—Similar to professional services agreements, construction con- tracts should define the expectations with regard to standards of performance and quality of work. The departure from professional services agreements is that, in most states, general contractors are not excused by minor errors, and instead, the work must be performed as specified by the contract documents. Performance provisions must, therefore, clearly iden- tify that the work shall be performed in accordance with the requirements of the 1) contract, plans, and specifications; 2) requirements of law, such as appli- cable codes and regulations; and 3) workmanship standards expected of contractors who perform simi- lar work in the community. It must be noted that contractors carry some degree of protection under the Spearin Doctrine, which provides that a contractor is not liable to an owner for defects arising solely from the architec- tural or engineering plans. See United States v. Spearin, 248 U.S. 132 (1918). The Spearin Doctrine generally only applies in the context of design speci- fications, where the contractor is obligated to follow the design, and not in performance specifications, where the contractor applies its skill in achieving an objective standard of performance. Where the professional services standard of care starts to intersect with construction contracting is in the use of special project delivery methods such as design–build and construction management at risk. In the design–build context, the professional services team (architect and engineer) work with the construction contractor under a single contract. All professional services work associated with the contract will in fact be governed by a professional services standard of care. The contract must clearly define that standard and which services fall under that level of performance. The better argument is that the Spearin Doctrine does not apply in this context, as the contractor was involved in the design development process. Construction management at risk contracts are a bit trickier, as the contractor acting as a construc- tion manager (CM) does not stand in the shoes of the architect and engineer, but does in fact assume professional services duties with respect to the design. Under this delivery method, the contractor becomes engaged during the design process to review the design for constructability, conflicts, scheduling and phasing issues, and cost issues. These are professional services typically handled by licensed professionals employed by the contrac- tor, and the standard of care will be a similar pro- fessional standard of care, as defined by the construction management community. Few con- tracts adequately spell out exactly how this distinc- tion works; clarity in that respect is important to ensure that the owner airport receives full value

9 and protection for the services it contracted. The bottom line is that the contract should clearly pro- vide that the CM bears a secondary level (behind the architect/engineer) of responsibility and liabil- ity for the performance of the design and primary responsibility for the construction. Example/Sample Provision The following is an example of how the standard of care or quality of work may be addressed to miti- gate risk in a construction agreement: The Contractor acknowledges and declares that the Con- tract Documents are sufficient to enable the Contractor to complete the Work as shown in the Contract Documents or, if not specifically shown, to perform the activities which may be reasonably inferred as necessary for completion of the Work in accordance with the requisite time frame, applicable laws, statutes, building codes, regulations, or as otherwise required by the Contract Documents. See Appendix B-1, Orlando International Airport. Appendix B-1 provides a survey of additional con- tractual provisions used by other airports to address standard of care or quality of work. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to standard of care or faulty work: • Work must be done in conformity with plans and specifications. • What will be the system for inspection to ensure that work conforms to plans and specifica- tions? • The contractor is responsible for supervision and direction of the work, including supervision of subcontractors. • Under what circumstances will the contractor pay for uncovering work, correcting work, and removing unacceptable work? • When and how may the owner suspend the work? 2. Schedule Control and Impacts.—Next to the quality of the work, the timeliness of the work is of near equal, paramount concern. Most construction contracts are critically schedule-dependent, and thus should have detailed “time is of the essence” clauses and supporting provisions. These provisions must address all attributes of the establishment of a schedule, modification and tracking, and the conse- quences and corrections if the schedule slips. At a minimum, these provisions should include: 1) The manner in which the schedule will be set, updated, and managed and how the schedule itself should be incorporated into the contract, at the very least with specified completion dates and milestones; 2) Liqui- dated damages that establish fixed consequences for schedule delays; for example, a set daily per diem for each calendar day of delay that the contractor fails to achieve the contract substantial completion date; 3) Identification of weather events that may entitle the contractor to an equitable adjustment in the con- tract schedule, versus anticipated, minor weather issues that would not; 4) Clear identification of which unforeseen conditions may give rise to an equitable adjustment to the schedule, versus conditions that should have been anticipated or readily determin- able by reference to as-built documentation or some site investigation; 5) Identification of events that are well outside the ability of the contractor to anticipate or plan for in its schedule (“force majeure”), such as war, terrorism, strikes, etc.; and 6) Remedies pro- vided to the contractor when a delay event occurs, which may be limited to time extension only (a more balanced approach is generally the better course, allowing for some relief from the schedule impacts, such as a day-for-day extension of the schedule and recovery of actual, direct costs but a limitation of indirect impacts such as home office overhead, loss of revenue, and the like). Example/Sample Provision The following is an example of how the delays and extensions of time may be addressed to mitigate schedule control and impacts risk in a construction agreement: 8.2.1 The Contract Time shall be adjusted only by CO [Change Order, as defined in the contract], CCD [Construc- tion Change Directive, as defined in the contract] or FCO [Field Change Order, as defined in the contract] in accor- dance with the limitations of the Owner’s Policies. 8.2.2 RCOs [Request for Change Order, as defined in the contract] and Claims relating to Contract Time shall be made in accordance with applicable provisions of Para- graph 4.3 and Article 7. 8.2.3 If any portion of the Work remains uncompleted after the expiration of the Contract Time, as adjusted by Con- tract Modifications, if any, the Owner will incur substantial injury, including loss of use or facilities and inconvenience to the public. Damages arising from such injuries cannot be calculated with any degree of certainty. It is agreed that if Substantial or Final Completion is not achieved within the established Contract Time as adjusted by Contract Modifi- cations, if any, the Contractor and the Contractors Surety shall be liable to the Owner for Liquidated Damages as identified in the Instructions to Bidders. Allowing the Con- tractor to finish the Work after the expiration of the Con- tract Time established by the Contract Documents shall in no way operate as a waiver by the Owner of any of its rights under this Contract or allowed by law. 8.2.4 The Work under this Contract is only a part of the Owner’s construction program. As a result, Work under this Contract may be required to be completed by certain milestone dates set forth in the Contract Documents (“milestone dates”) in order to interface with the work on other components of the Owner’s construction program.

10 The schedule for the Owner’s construction program or the specification of milestone dates is not intended to take the place of complete Work scheduling by the Contractor, but is provided to show certain critical milestone dates for various phases of the Work on which the Contractor’s Baseline Schedule or Progress Schedules must be based. There shall be no changes in the milestone dates, except by CO, FCO or CCD. In the event that the Contractor fails to complete any required portions of the Work by the mile- stone dates, the Contractor and its Surety shall be liable to the Owner for the Liquidated Damages identified in the Instructions to Bidders. In the event that the Contractor completes any required portions of the Work ahead of the milestone dates or is precluded from doing so by acts of the Owner or third parties, the Contractor shall not be enti- tled to damages against the Owner for completing or fail- ing to complete the Work earlier. 8.2.5 The Contractor shall cooperate with the OAR [Owner’s Authorized Representative] in order to maintain the prog- ress of the Work in accordance with the Contractors current accepted schedule and Contract Time requirements. In addition to the requirements of Paragraph 3.9.3 regarding Progress Schedule updates, if the Owner or OAR deter- mines that the Contractor is failing to maintain the prog- ress of the Work, through no fault of the Owner, the Contractor must, within seventy-two (72) hours of written request of the OAR, submit a written response detailing the Contractors plan of action to recover lost time in order to maintain the progress of the Work in accordance with the Contractors current accepted schedule or Contract Time requirements. In such event, the Contractor shall comply with the OAR’s written orders to take whatever steps are necessary to recover lost time and maintain the progress of the Work. These steps may include, but are not limited to, re-sequencing the Work activities, increasing the number of Contractor’s shifts, workforce, supervision, work days, over- time operations, equipment resources, or expediting deliv- ery of materials or equipment. Regardless of the manner in which the schedule is recovered, the Contractor shall not be entitled to additional compensation for actions that relate to the recovery of the schedule. 8.2.6 In addition to other remedies available to the Owner, if the Contractor fails to maintain the progress of the Work in accordance with the Contractor’s current accepted sched- ule or Contract Time requirements, the Owner may, upon seven (7) days written notice to the Contractor and its Surety, order the Contractor to suspend or cease all or a por- tion of the Work and the Owner may demand that the Con- tractor’s Surety prosecute all or a portion of the Work in accordance with the Contract Documents. Failure of the Surety to so perform within seven (7) days of receipt of such notice shall be grounds for the Owner to prosecute the Work at Surety’s and Contractor’s expense. See Appendix B-2, Orlando International Airport. Appendix B-2 provides a survey of additional con- tractual provisions used by other airports to address schedule control and impacts. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to schedule control and impacts: • The manner in which the schedule will be set, updated, and managed, including specified comple- tion dates and milestones. • Liquidated damages for each day of delay. • Weather impacts. • Unforeseen conditions. • Force majeure. • Limitations of remedy (i.e., “No Damages for Delay Clause”). 3. Scope and Change.—Change orders are the bane of any construction contract. Owners fear them; contractors love them. The truth is some- where in the middle, as most construction projects experience some modification through change orders to account for a myriad of occurrences that can impact any job. Some changes are actually positive, when, for example, an owner enhances the project with additional features or scope. Some changes address the consequences of architectural errors and omissions. Some changes arise from contractor performance issues, discovery of unforeseen condi- tions, or weather impacts. Detailed provisions regarding how and under what terms the contract can be modified are a significant part of the contract and the risk mitigation strategy. Example/Sample Provision The following is an example of how an owner’s change may be addressed to mitigate risk in the form of a change order in a construction agreement: 2. CHANGE ORDERS (CO) A CO is a written contract modification signed by the Owner and Contractor stating their agreement upon all of the following: a. a change in the Work or the Contract Documents; and b. the amount of the adjustment in the Total Contract Price, if any; and c. the extent of the adjustment in the Contract Time, if any. Provided the Contractor executes the CO, the Owner may issue a CO Notice to Proceed in accordance with the Own- er’s Policies. The CO Notice to Proceed authorizes the CO work pending the Owner’s execution of the CO. See Appendix B-3, Orlando International Airport. Appendix B-3 provides a survey of additional con- tractual provisions used by other airports to address schedule scope and change orders. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to schedule control and impacts:

11 • Scope identification covered by the change. • Basis for change/contract modification, cover- ing owner change, contractor change, and errors and omissions. • Remedy/limitations of remedy/pricing of change. • The change order should be a complete “mini- contract” covering all elements of scope, cost, and time. 4. Remedies.—An often overlooked section of con- struction contracts deals with remedies. This is a major section of any construction contract given the numerous issues that can, and often do, arise on any job. The contract may include detailed provisions that provide for the contractor to correct defective or deficient work during the course of construction and for a period thereafter. The normal post-completion warranty on construction contracts is 1 year, with specially manufactured goods commonly being war- ranted by the subtrade or supplier for an extended period (for example, an elevator may carry a 10-year warranty with corresponding maintenance provi- sions). Note that in most states, the period of the warranty is not the duration of the contractor’s exposure for latent defects, as many states allow legal actions to recover damages for a period that extends beyond the warranty. The contract should also clearly identify which damages are recoverable and those that are dis- claimed. For the owner, it is often best not to limit recovery, with no limitations of actual damages or waivers of consequential damages if possible (note that the standard AIA Document A201 mutually dis- claims consequential damages, which is rarely in the best interest of an airport owner). Conversely, the financial remedies allowed a contractor should be defined, and limited, to avoid inflated claims for alleged losses of efficiency, future opportunities, and revenue and home office overhead, for example. The objective is to create a fair, balanced contract that provides adequate redress to the airport for impacts caused by the contractor, while circumscribing which remedies a contractor may obtain. As in professional services contracts, a broad indemnity provision is important in limiting risk and shifting it to the appropriate parties, and if allowed by state law, also in requiring a duty to defend any ensuing litigation. The rights each party has to terminate for causa- tion can also be identified in the contract, with lim- ited rights to cure if possible. For example, the owner should be permitted to terminate for events such as persistently poor or untimely performance, signifi- cant safety or security violations, bankruptcy, and nonpayment of subcontractors; whereas the contrac- tor should be permitted to terminate based on non- payment, persistent late payment, or suspensions of a certain duration. The key, then, is to define which rights and remedies are available on termination, including the owner’s right to withhold retainage and future payments to offset impacts attributable to termination. The owner should also reserve the right, in a separate provision, to terminate for con- venience, which allows the owner to terminate the project for any reason or no reason at all. On such a termination, the contractor should be expressly limited to payment for actual work performed and limited compensation for shutting down the job and demobilizing, while waiving any rights to compensation and profit on work not performed. Example/Sample Provision The following is an example of how to address the effect of owner cancellation or termination in order to mitigate risk in a construction agreement: If the Owner cancels or terminates the Contract, the Con- tractor shall stop all work on the date specified in the Notice of Cancellation or Termination and shall: A. Cancel all orders and Subcontracts which may be termi- nated without costs; B. Cancel and settle other orders and Subcontracts where the cost of settlement will be less than costs which would be incurred were such orders and subcontracts to be completed, subject to prior approval of the Field Representative, C. Transfer to the Owner, in accordance with directions of the Field Representative, all materials, supplies, work in progress, facilities, equipment, machinery or tools acquired by the Contractor in connection with the performance of the work and for which the Contractor has been or is to be paid; D. Deliver to the Field Representative As-Built Documents, complete as of the date of cancellation or termination, Plans, Shop Drawings, Sketches, Permits, Certificates, War- ranties, Guarantees, Specifications, three (3) complete sets of maintenance manuals, pamphlets, charts, parts lists, spare parts (if any), operating instructions required for all installed or finished equipment or machinery, and all other data accumulated by the Contractor for use in the perfor- mance of the work. E. The Contractor shall perform all work as may be nec- essary to preserve the work then in progress and to pro- tect materials, plant and equipment on the site or in transit thereto. F. Cancellation or termination of the Contract or a portion thereof shall neither relieve the Contractor of its responsi- bilities for the completed work nor shall it relieve its Surety of its obligation for and concerning any just claim arising out of the work performed. G. In arriving at the amount due the Contractor under this Article, there will be deducted, (1) any claim which the Owner may have against the Contractor in connection with this Contract and (2) the agreed price for, or the pro- ceeds of sale of materials, supplies or other items acquired by the Contractor or sold, pursuant to the provisions of this Article, and not otherwise recovered by or credited to the Owner. See Appendix B-4, Miami International Airport.

12 Appendix B-4 provides a survey of additional con- tractual provisions used by other airports to address available remedies. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to available remedies: • Provide clearly defined warranty and correc- tive work provisions. • Outline that the owner is entitled to recover all actual and consequential damages. • Clearly specify all rights and remedies of each party on termination. • Provide for broad-form indemnity. 5. Claims Presentation and Dispute Resolution.— The claims presentation and dispute resolution clauses to a construction contract are a significant component of a risk mitigation strategy. These pro- visions can collectively frame the issues in dispute, create a process for early resolution, and if final adjudication is necessary, create a process with boundaries and some semblance of control. It is important for the airport to envision these clauses working during the performance of the contract and not just after completion of the project. The contract will ideally require notice of a claim within a very short period of time of the claim aris- ing, along with detailed presentation requirements such as a claim narrative, schedule analysis if time is requested, and a computation of the quantum sought with backup documentation. For example, if midway through the project the contractor encoun- ters a major subsurface condition, it should be required to immediately notify the airport owners so that appropriate and timely evaluation and correc- tive measures can be implemented. If the contractor believes it has been impacted, either in time, costs, or both, it should be required to present and sub- stantiate its claims for thorough evaluation, which is critical to an airport for various reasons, budget control being first and foremost. Failure to provide this information should bar the claim. The intent is to define the issues in a timely manner so that prompt resolution can be attempted. The contract should also provide a structure for pre-suit or pre-arbitration resolution, whether that structure includes requirements for executive-level personnel to meet and attempt resolution and/or early mediation. The contract should clearly specify the final mode of resolution—i.e., litigation (jury or nonjury or arbitration) and preferably the venue and jurisdiction where the matter will be heard. Consideration should be given to the complexity of the project, as the larger and more complex construction projects perhaps are best suited for arbitration before a panel of experts, or if being liti- gated, a nonjury trial. Larger, complex construction or infrastructure projects may justify advanced res- olution techniques such as the empaneling of a dis- pute resolution board with construction industry professionals being engaged at project commence- ment to assist in the resolution of a dispute, in situ, when it arises. Although this topic of advanced reso- lution is beyond the scope of this digest, additional information can be found at www.drb.org/. Example/Sample Provision The following is an example of how to address the claims process to mitigate risk in a construction management at risk agreement: 15.2 Claims Process. The Owner’s liability to CM@R [Con- struction Manager at Risk] for any claims arising out of or related to the subject matter of this Agreement, (including, but not limited to, claims for extension of construction time, for payment by the Owner of the costs damages or losses because of concealed conditions as defined in Article 10 or for additional work), shall be governed by the following provisions: (1) If a CR [Contingency or Time Request] is denied and the CM@R disagrees with the denial, the CM@R must submit a written Notice of Claim to the OAR, copying the Owner’s Senior Director of Planning, Engineering and Construction, within 5 business days of receipt of the notice of the denial. The Notice of Claim must include a copy of the denial and a detailed statement of all elements of the claim, a descrip- tion of the work affected, a timeline or schedule of events related to the claim and an itemized, detailed cost break- down sufficient to analyze the value and time impact of the claim, specifically describing all cost and time impacts. The CM@R shall follow the protocol that is established for its delivery of notices of claims, which must include a transmit- tal signed by the Program Director or designee. The CM@R waives all claims and releases the Owner from all liability for potential claims when a Notice of Claim is not timely submitted. Daily reports, Applications for Payments and other administrative documents required by this Agree- ment do not constitute written notice of a claim. (2) For any claim made by the CM@R against the Owner, the basis of which includes a claim by a subcontractor, or any other person or entity under the CM@R’s control, for acts or omissions allegedly attributable to the Owner, the CM@R must certify by affidavit that it has carefully exam- ined each subcontractor’s claim and has verified the accu- racy and contract compliance of each claim. Such certification under oath must be made by the CM@R prior to the submission of any subcontractor claim to the Owner and shall constitute an express condition precedent to the CM@R having a cause of action against the Owner that includes a subcontractor’s claim. A copy of such certification shall be provided to the Owner contemporaneous with the submission of any subcontractor claim to the Owner. The Owner will not consider any claim that has not been prop- erly certified by the CM@R. (3) The CM@R’s compliance with the CR requirements of Article 10.2 [Request for Contract Modifications] and the Notice of Claim and documentation requirements set forth

13 in Paragraphs 15.2 (1) and (2) is an express condition prec- edent to the CM@R having a cause of action against the Owner and to any other dispute resolution process in this Agreement. The failure to comply with Paragraphs 10.2 and 15.2 (1) and (2) shall constitute a waiver of the claim. (4) The parties shall make every effort to work in good faith and cooperate to fully resolve any claim and agree upon a Contract Modification. (5) If an agreement cannot be reached on a properly submit- ted claim, either party may provide written notice of the unresolved dispute to the Chair of the Dispute Review Board (DRB), within 10 business days after a final decision has been reached on the dispute (i.e., the Owner’s denial of the claim or any portion thereof). The Owner, OAR, CM@R, and Consultant shall all be provided a copy of the notice. The notice shall state clearly and in detail the specific issue to be addressed by the DRB, the basis for the party’s objec- tion to the final decision made by the other party, and the requested recommendation of the DRB. See Appendix B-5, Orlando International Airport. Appendix B-5 provides a survey of additional con- tractual provisions used by other airports to address dispute resolution. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to dispute resolution: • Claim-presentation timing requirements for notice and substantiation options (for example, notice within 15 days of event and substantiation 30 days later). • Pre-suit mediation or tiered-negotiation options for pre-suit resolution. • Claim audit rights and/or limited discovery rights. • Litigation or arbitration as final resolution option (specifying jury versus nonjury, or if arbitra- tion, the number of panelists, plus governing law, venue, and jurisdiction). • Consider Advanced Alternative Dispute Resolu- tion (ADR) or Dispute Resolution Boards for larger, complex construction or infrastructure projects. • If allowed by state law, contractually limit statutes of limitation and repose to a commercially reasonable duration. Insurance and Bonds Comprehensive insurance coverage is a corner- stone to a risk mitigation strategy in any construc- tion contract. Airport owners must thoroughly evaluate the risks—project size and complexity ver- sus possible and worst-case damages scenarios—in order to customize the insurance and coverage lim- its to the project and risk. Section A on Professional Services Agreements generally outlines the salient issues on professional liability and CGL policies; thus this section is limited to specific issues relevant to construction contracts. a. Professional Liability Policies.—Professional liability coverage is not generally necessary for stan- dard construction contracts using a general contrac- tor or design–bid–build delivery method. As the contractor in this context has no responsibility for design, professional services coverage is not neces- sary. When advanced delivery methods such as design–build or construction management at risk are employed, professional liability coverage in the name of the contracting entity (not just in the name of any sub-tier design firm, if retained) is a necessity. The contract must provide adequate professional liability coverage to insure design defects and other errors and omissions of the contractor while provid- ing any professional services, whether that be actual design on a design–build job or preconstruction ser- vices such as design and constructability review and conflict coordination. b. CGL Policies and Wrap Policies.—CGL cover- age in an amount commensurate with the project value and risk and naming the airport owner as an additional insured on a primary and noncontribu- tory basis, coupled with completed operations cover- age for the period of limitations under the applicable state law, is the gold standard for insurance cover- age for construction. On larger projects, an Owner Controlled Insurance Program (OCIP) or Contractor Controlled Insurance Program (CCIP)—sometimes referred to as “Wrap Coverage”—affords greater and more comprehensive coverage at a better price, rolling in all subtrades, auto coverage, workers’ com- pensation, and sometimes pollution coverage. Air- port owners should seek counsel from a sophisticated insurance consultant to assist the legal team in devising a comprehensive, customized program for these larger projects. c. Builder’s Risk.—The airport owner should carry property insurance or builder’s risk insurance to pro- tect the construction project from casualty events like fire, storm, or other catastrophes during the course of construction. This is a risk for which the airport owner is responsible, so coverage should be procured. For example, if a project collapses during construc- tion because of an accident or other casualty event, a contractor’s CGL policy may not cover the incident, whereas a builder’s risk policy should. More complex projects carrying greater risks may also justify broader builder’s risk coverage with a LEG-3 endorse- ment, providing coverage for some design and con- struction errors occurring during construction. d. Subguard.—Subguard is a specialty product commonly promoted by contractors on larger jobs, in