You’re Out! Cost-Effective Risk Transfer
Developers, owners, designers, contractors, and every other member of the construction industry spend enormous amounts of time negotiating risk transfer mechanisms. Endless hours and pixels are dedicated to lengthy indemnity, additional insured, and waiver of subrogation provisions. And while those clauses are an important part of most every contract in the industry, they only go so far. An equally important and often overlooked risk transfer mechanism is a properly drafted scope of work. This includes not just what’s in, but also what’s out.
A. You’re either in…
Scopes of work (or scopes of services for design professionals or consultants) come in many flavors. Sometimes they are broadly defined as everything shown in the plans and specifications. Other times, they are very narrowly defined in proposals submitted by consultants or subcontractors. In rare instances, including one we recently litigated, the scope of work may be defined by a series of cryptic text messages exchanged between the parties.
Carefully defining what is included in the scope of work creates certainty among the contracting parties and allows the party performing the work to negotiate appropriate compensation for that work and the associated risk. If also enables the various parties involved in the design and construction of a project to determine whether all the work is covered or whether scope gaps exist that require filling before construction of the project commences.
For developers or owners, one of the more common scope gaps is coordination, both on the design and construction side of the project. Coordination of the design can prevent, for instance, the structural plans and the architectural plans from pointing to one another to provide details about the design of exterior flatwork, with the end result being that neither one provides a detail for the item.
For general contractors, scope gaps can arise when scopes are poorly defined or not assigned to trade contractors. For example, construction managers at-risk (CMAR) often have preconstruction responsibilities that are not uniformly understood by the developer and contractor. If the intent of such services to provide preliminary budget costs for value engineering exercises, only, then the scope would be written more narrowly than if the CMAR is supposed to review the construction drawings for constructability and coordination. In theory, the CMAR’s fee for review of constructability and coordination should be commensurate with the increased risk associated with that work.
For lower tier consultants and contractors, the risk of poorly defined scopes increases the risk to everyone. Many times, subconsultants and subcontractors prepare proposals that define their own scope of work and, either by themselves or as an attachment to formal contracts, define the extent of the work. For example, a waterproofing consultant in a condo conversion project may intend to review newly installed systems, only, and not any existing building systems. If the scope does specifically state the limited scope of services, the owner may labor under the belief that all the building systems, new and old, have been reviewed.
B. …or you’re out
Perhaps of greater importance than defining what is included is defining what is not. Simply put, you’re either in or you’re out. Exclusions assist in creating clear expectations, allowing the owner, architect or general contractor to identify and fill scope gaps, and most importantly, manage risk.
As a best practice, exclusions should mirror the terms used in the contract documents and construction drawings. If the subcontractor’s intent is to exclude installation of through wall flashings, then the exclusion should not be couched in common industry terms, but in the terms used and called out in the architectural and roofing drawings. Similarly, if the designer’s intent is not to provide any construction administration services, then the types of services incorporated in that category, e.g., review of submittals, site observation visits, responding to RFIs, should be spelled out in the list of exclusions.
The flip side of managing risk is shifting risk. Exclusions do both. If used properly used and understood at time the contracts are signed, the risk can me managed. If not appreciated and delegated, the risk may shift without being actively managed. For instance, an owner that retains two different contractors to build the core-and-shell and interior finishes of a project will need some degree of coordination between the contractors. If each contractor excludes coordination with the other, the owner retains that responsibility or must find another person, typically an owner-retained project manager, to assume it. If the owner fails to appreciate that risk when the contracts are signed, it may first learn that it assumed the risk only after delays hamper substantial completion or tenant move-in.
Whether through inclusion or exclusion, a tightly written scope of work allows the parties to identify, manage and allocate risk, negotiate appropriate compensation, and identify scope gaps in timely and efficient manner. In-house risk managers, in-house counsel or outside counsel, depending on the structure of your company, are important participants if identifying and determining risk, and can provide invaluable insight into preparing well drafted scopes of work. The attorneys in our Austin and Dallas offices have significant experience drafting, negotiating, interpreting and all-too-frequently litigating design and construction contracts, including scopes of work, and are available to answer any questions you may have. You may contact us at info@gstexlaw.com.
Legal Disclaimers
This blog is made available by Gerstle Snelson, LLP for educational purposes and to provide general information about the law, only. Neither this document nor the information contained in it is intended to constitute legal advice on any specific matter or of a general nature. Use of the blog does not create an attorney-client relationship with Gerstle Snelson, LLP where one does not already exist with the firm. This blog should not be used a substitute for competent legal advice from a licensed attorney.
©Gerstle Snelson, LLP 2021. All rights reserved. Any unauthorized reprint or use of this material is prohibited. No part of this blog may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system without the express written permission of Gerstle Snelson, LLP.