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Following is the first of an occasional series of case
studies by James Acret, well-known author of books on construction
law. The case studies will examine issues that can arise
on construction projects.
By James Acret
When
he took his MBA at Columbia Elmer specialized in real estate.
He knew just about everything there was to know about calculating
the probable discounted return on capital invested in a
development after taking into account maintenance, depreciation,
management, taxes, insurance, marketing, and projected vacancy
factors.
He
had a business plan to develop luxury apartments in Orange
County, where the rental market was strong. Admittedly he
didn't know a great deal about construction. He would hire
an owner's representative to look after that side.
Elmer
put together a package that included land, zoning, construction
financing, takeout financing, and marketing. Investors could
expect a cash flow that would be virtually tax-free for
seven years.
A
native of Detroit, Elmer was a fanatical hockey fan. He
befriended some NHL players and got himself a pair of seats
next to the penalty box. He had no trouble selling the development
package to his hockey buddies. They were looking for an
outlet for their ridiculous salaries.
He
knew that contractors always whine and snivel about losing
money on a job and try to make up for it by claiming extras.
He started looking around for a contract form that would
protect him. He found the AIA form to be very weak in this
area. The provisions dealing with change orders were lengthy,
and gave the contractor way too many opportunities to claim
extra compensation, especially if the contractor was working
in cahoots with the architect.
He
finally found a form that seemed to give adequate protection
to the owner. After he modified it to make it even stronger,
it read this way:
All the work performed by the contractor will be deemed
to be included within the contract price and under no
circumstances whatsoever will the contractor be entitled
to be paid any extra compensation beyond the contract
price unless pursuant to an extra work order signed by
both parties before the commencement of the extra work
that clearly specifies that the work is extra and the
amount to be paid therefor.
Work
was proceeding on schedule when the city building inspector
red-tagged the job. The rebar design, according to the inspector,
did not meet code. The only practical solution was to add
reinforcing steel.
Elmer
did his homework. He knew his contractor, J&G, would
try to rob him, so he got check bids in advance. The number
he finally got from J&G was an obvious gouge. The rebar
modifications were worth approximately $22,000 but J&G
demanded $50,000 and wouldn't settle for a cent less. They
were at an impasse. Elmer suspected Joan, the rebar subcontractor,
and J&G were in cahoots. To hire another rebar subcontractor
to follow Joan and make the necessary corrections was wildly
inefficient and expensive. He considered throwing Joan off
the job but that would get him into a wrongful termination
suit where Joan would claim her lost profit. He considered
hiring a separate subcontractor to work shoulder to shoulder
with Joan but to do it that way would cost more than $50,000
and would give J&G an excuse to demand an extension
of time. Removing J&G from the job would be even worse
than removing Joan. To delete the rebar work from J&G's
contract was unfeasible.
The
problem was, he couldn't make J&G do a change without
getting its signature on the extra work order! He was hoist
by his own petard. J&G had a contractual right to perform
the work per plans and specs. Elmer held his nose and signed
for the $50,000.
It
was a chastening experience. He'd been outsmarted by a couple
dumb contractors with mud on their boots! In a reflective
mood, Elmer took another look at the AIA contract. He still
felt it was too complicated but at least he could have demanded
the change regardless of whether J&G agreed to it and,
using the power of the purse strings, avoid a gouge. It
reminded Elmer of a line from James Thurber: it's better
to fall flat on your face than to bend over too far backward!
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