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The Spearin doctrine protects the contractor.  In United States v Spearin (1918) the doctrine states “. . . if the contractor is bound to build according to plans and specifications provided by the owner, the contractor will not be responsible for the  consequences of defects in the plans and specifications.” In such cases, the courts have held that the owner impliedly warrants that such design documents, if followed, will result in a buildable project.  The owner is liable because he can control the design through his control of the design professional.   The architect’s liability is often limited.  Indeed,  in an earlier case of Coombs v Beede (1896), the court held “The undertaking of the architect implies that he possess skill and ability, including taste, sufficient to enable him to perform the required service at least ordinarily and reasonably well. . .But the undertaking does not imply or warrant a satisfactory result.”

In a design build scenario, the contractor is the design professional and so the Spearin Doctrine disappears.  The design builder has an implied warranty of performance.  Thus, a design builder may find it difficult to get a change order funded by an owner. The owner wants the design builder to be the single point of responsibility.  That is a two-edged sword. You may think a project will go smoother if you were in charge, but the fact is, you are in charge.  The buck stops here.  Further, the buck can stop here for a long time into the future.  A majority of claims for design errors are often not made until 3 or 5 years after the project is completed.  Architects have E&O insurance and no assets to attach.  Many design builders have no E&O insurance, but have lots of assets so they can qualify for bonding. Their bank account becomes their E&O insurance by default.   Although there’s a lot more risk if you choose design build,  it’s a risk you can manage.  You can purchase a liability policy designed for the design builder.  The NASBP has an excellent product we can recommend.  You can use construction documents designed to address design build issues.  The AGC has some of the best documents available for this purpose. Get your insurance agent, attorney, and bonding agent all working with you to manage the risk.

Design build is the fastest growing delivery system in the United States.  In five years, some estimate that as much as 70% of all construction will be design build. We bond a lot of design build projects.  It’s a delivery method that can be a great opportunity.  Just be sure to have your eyes wide open to the risks.  Give us a call if you would like more information on design build.

Maximize your profit by regularly checking your ever-changing break-even point.  Indeed, as the construction market changes, you’ll want to manage your break even point, or it could come back to haunt you – Big Time! Your break even point is figured by dividing your Total Fixed Expenses by your Gross Profit Percentage.  Thus, if your fixed expenses are running $100,000, and you are earning 10%, then your break even point is $1,000,000 in sales.  Most general contractors would figure their fixed expenses to be the same number as their General and Administrative Expenses.  Subcontractors who use equipment would need to add their fixed equipment expense to their G&A.  Those equipment payments can sneak up and bite you, IF you’re not watching.

Play with the “what-if” scenarios:  What if, next year, your sales dip by 10%, or your gross margins  drop by 3%?  How will that affect your bottom line?  It could mean you are losing money.  You should figure your break even point today. Then during this coming year, you should check it monthly, quarterly and annually.   Be sure to make modifications in your business as you see is needed.

There are two basic types of mistakes in bids: errors in judgment and clerical mistakes. The difference between the two is considered the “intention” of the bidder. Did the contractor originally intend to perform the project at the price bid? It’s important to understand the difference since clerical bid mistakes are generally correctable to the intended amount, while mistakes in judgment are not.

An error in judgment includes carelessness of the contractor, failure to research project conditions, and miscalculations of completion times. This type of mistake rarely results in the withdrawal of a bid and never allows a contractor to correct the original bid. At best, a contractor may withdraw the bid; at worst, he must perform the contract at the mistaken bid price.

Clerical mistakes include basic mathematical errors like obvious misplacement of a decimal point or incorrect addition or multiplication, and even the absence of a key component of the bid which can only be detected by reviewing the supporting worksheets and bid documents. They may result in either withdrawal or correction of the bid.

The remedy of a mistake is greatly influenced by whether it is discovered before or after the award. It is far easier to withdraw or correct a bid prior to award than after, when the contractor must prove the government knew of the mistake at the time of award. Also, the burden of proof is quite different depending on whether the contractor would like to change or withdraw the bid, or cancel the contract.

Should a bid mistake be caught before award, the contractor should send a prompt written request to the contracting officer to withdraw/modify the bid, along with support data. We recommend you contact a knowledgeable bond agent or your attorney for assistance in determining if a mistake is considered clerical or judgmental. For more details on Mistakes in Bids, please call us toll free at 888-786-2663.

If you are fortunate enough to find work on a large project, it is possible that the project might be covered by a controlled insurance program. Contractors around the country have learned over the years that these CIP’s might not be as all encompassing as you might assume. There have been subcontractors who have found it difficult to obtain claims information. Some subs have found that the coverage was cancelled by the sponsor without replacement coverage being made available to the subcontractors. In some instances, the deductibles to the subcontractors have been very high. These deductibles might not seem so bad if you are a nationwide General Contractor, but they could be devastating to a local subcontractor. In some cases, the general liability coverage did not include completed operations for the statute of repose. This leaves the participants without proper coverage for claims that could arise years after the job is completed. Finally, the self-insured retentions that the general contractor might build into the program might not be fully funded which could compromise the coverage for the subcontractors. This is not a complete list of things to consider when participating in a controlled insurance program. Indeed, these are areas of concern that became of such concern that the State of Kansas recently passed a law to regulate these particular areas in their state. It would be very wise to have your insurance professional review the controlled insurance program and advise you of any additional risks you might undertake prior to signing the subcontract.

by Terry Zaudtke, P.E., Conklin, Porter & Holmes (407) 425-0452

In our fast paced world of project completion, the issue of quality gets a lot of verbal attention, but is often sacrificed to time constraints. It is also sacrificed when the three parties, owner, contractor and designer, become adversarial and communication breaks down. Quality in a project is an essential part of satisfaction. Quality will produce a satisfied owner, contractor and engineer who are proud to display the completed work product and claim it as their own. For a successful project, all parties must have a sense of pride in the completed project and the satisfaction of a job well done.

“Quality in the constructed project is much more than merely quality assurance and quality control (QA/QC) programs carried out by the project participants. It is a state of mind of all involved in the project that places quality foremost” (ASCE, 90).

Quality assurance and quality control (QA/QC) is the responsibility of the entire project team, including the owner. The owner must state their quality requirements upfront in the process whether it is a design/build project or conventional. The owner must be informed and recognize that absolute perfection is beyond the owner’s budget. The designer assists the owner in the QA/QC goal setting process. The designer must realize that during the design phase, he is solely responsible for the quality of the design. The owner and designer must communicate these goals to the contractor. By stating the project quality goals in the beginning, i.e. the specifications or the RFP, the contractor can price the project accordingly. It is then up to the contractor to meet the quality goals which have been established. The team responsibility does not end here. A team approach involves all team members throughout the project. Quality control inspections by the owner and designer should be performed with the motive of encouraging and ensuring good workmanship rather than catching the culprits.”