Avoid Legal Blunders

Take this advice and stay out of court.

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In a well-planned school construction project, the most critical events occur before the first shovel hits the ground. Attorney Howard Kelin, a partner with Kegel Kelin Almy & Grimm LLP of Lancaster, Pennsylvania, in conjunction with the National Clearinghouse for Educational Facilities, offers these 10 steps on how to stem legal problems:

1. Don't wait to negotiate.
Although millions of dollars are at stake, districts often simply adopt the contract provisions provided by architects, construction managers, and other consultants without question. District leaders commonly hand their attorneys the agreement for merely a "quick review," or even rely on a project architect to prepare the agreement between the district and construction manager without any review. These procedures create conditions ripe for legal problems down the line.

 

Never authorize an architect or construction manager to proceed with work before negotiating final contract provisions. If the school board takes official action to retain an architect or construction manager without a firm agreement in place, the terms of the project should be subject to the negotiation of satisfactory contract terms. Authorizing work before terms are reached compromises your district's negotiating leverage.

2. Give your project team their due.
Due diligence includes the word diligence for a reason—it's not enough to ask architects and construction managers to provide information about themselves. You need to know their background, insurance coverage, legal status, and a detailed history of their projects during the past five years. Dig for information that doesn't jump off the page. (See box, The Devil Is in the Detail.)

Once you have this information, verify it. When calling other school districts, talk not only to the contact person identified by the applicant but also to the superintendent or business manager. If the applicant mentions prior litigation, arbitration, or mediation, ask your school district's attorney to get the facts from the attorneys involved in the matter. Most important, inquire about the individuals who will be assigned to your project. If they are new hires, contact both the prior employers and former clients.

3. Ensure adequate insurance coverage.
How much insurance coverage for professional liability is appropriate for project consultants? Many architects and construction managers carry only $1 million of coverage for negligence, while others involved in the construction process, such as materials-testing companies, may carry little or none. Because school construction projects can cost tens of millions of dollars, correcting defective work could add up to considerably more than the insurance coverage normally carried by project consultants.

Although it may increase their fees, consider requiring construction consultants to raise the amount or scope of their professional liability coverage. Insurance brokers can help your district identify options in this area. For example, a school district might ask its architect to add a $4 million rider to its current $1 million professional liability policy. The rider can take effect at the start of construction and extend for five years (the two-year construction period and three years following).

Another option is project liability insurance, in which an insurance company provides coverage in the event of defective work by the architect, construction manager, engineers, surveyors, landscape architects, and any other professionals named as "insured" in the policy. In the event of a claim against more than one of the covered consultants, there is no fighting among the different parties and their insurance companies. Because the insurance is purchased at the outset of the project for a predetermined number of years, including post-construction, schools are covered for damages not discovered until after the construction is completed. The downside is that project liability insurance can be expensive, and infighting can still occur if an uncovered trade contractor caused the defect.

4. Be clear about the architect's duties.
Standard owner-architect agreements may not serve the best interests of your district in a number of key areas. (See box, Why You Need an Owner-Architect Agreement.) Consider these provisions in your agreement:

• Determine the scope of basic services, as the architect may require further payment for "additional services."

• Calculate the fee as a percentage of the construction cost. Clarify if any costs can be excluded from the base amount, if you can use a "declining scale of rates," and if the percentage is based on estimates or actual bids.

• Ask to approve the architect's choice of consultants.

• Require a minimum number of hours or frequency of site visits during which the architect reviews the work of other consultants. Demand that the architect immediately notify the owner of any defective work.

• Include your own standard-of-care clause.

• Require that the architect reimburse the district for legal fees if a claim arises from the architect's negligence.

• Define the compensation for additional work and be clear about all other markups.

5. Specify your agreement with the construction manager.
As with the architect, contract issues should be clearly laid out with the construction manager. In your agreement, special attention should be given to the following:

• Incorporate the scope of services of the Request for Proposal (RFP) and the pertinent portions of the applicant's RFP response. The construction manager is then obliged to perform all the district's requests, as well as everything included in the response, regardless of whether such actions are required elsewhere in the agreement.

• As in the owner-architect agreement, specify the standard of care to be utilized.

• Require the construction manager to agree that the funds allocated for its oversight of construction are adequate to sustain proper supervision of the work.

• Since construction managers typically lack the resources to perform materials testing, separate testing firms retained directly by the owner normally perform this procedure. You may want to require your construction manager to coordinate and review this work.

• Perform a final review of all parties' agreements to ensure that their provisions do not conflict or overlap.

6. Get a grip on resolving gripes.
In the event of a dispute with the owner, provisions in the standard agreements for architects and construction managers require parties first engage in nonbinding mediation. Failing that, they are to engage in binding arbitration, rather than litigation. Although mediation and arbitration can work well, these provisions may be contrary to the interests of the school district.

For many reasons, the district might not be able to compromise at the onset of a construction dispute. In fact, at the early stages of the dispute, the district might not know enough about the problem to participate meaningfully in mediation.

There is little reason, therefore, to mandate that in the event of a dispute the parties must incur the time and cost of participating in nonbinding mediation before moving to arbitration or litigation. This does not denigrate the use of mediation, which very often is an effective tool for resolving construction disputes later in the litigation process. Arbitration can be useful in resolving minor disputes, but it is often not as helpful to districts as litigation in dealing with more significant matters.

7. Look under the lid in bid packages.
Bid packages contain the contract provisions to be entered into with trade contractors. While the school district's attorney usually does not need to review the technical aspects of the bid packages, include enough time in the project schedule for legal review of the non-technical provisions that detail the legal rights and obligations of the trade contractors. Architects may not always use terminology in preparing bid packages that is most beneficial to owners.

8. Prepare bond forms.
School districts should develop their own surety bonds to include with bid packages instead of using the standard industry bond forms. Doing this can be of particular value with respect to performance bonds. By specifying that the performance bond remains in effect until the trade contractor completes all work defined in the contract documents, the bond remains in effect even if the owner identifies construction defects years after the project is completed.

9. Manage the low bidders.
There are often questions about whether a district must select the lowest bidder—either because the district is trying to reject what it believes to be a "nonresponsible" bidder or because the contractor claims to have made a bid error and wants to withdraw its bid. In general, whenever a school board considers whether to reject a low bid or refuse withdrawal, the price difference between the lowest and next lowest bids is an obvious factor to consider, but take into account the risk of keeping the low bidder.

10. Consider the big picture before getting into the fray.
Districts face two big decisions during construction in the event of a dispute: when to get involved and when to bring in legal counsel. Address these situations on a case-by-case basis. Your district is already paying consultants to manage the project, so it should be careful before spending extra time and money on such problems. As far as your counsel, construction lawyers can often keep a minor problem from erupting into a major one—if they're invited to help resolve it early. Be certain to document the facts of the dispute as well.

Including a legal plan in every school construction project may cause a small headache up front—but it can avert enormous problems later on. Such measures increase your district's chances of completing the project on time, on budget, and without litigation.

This article was adapted from an original publication by the National Clearinghouse for Educational Facilities as Ten Ways to Avoid Legal Problems in School Construction and can be found at www.edfacilities.org/pubs/Avoid_Legal.pdf

Howard L. Kelin is a partner at Kegel Kelin Almy & Grimm LLP of Lancaster, Pennsylvania. He works in the areas of education law, litigation, and construction law. You may contact him at kelin@kkaglaw.com.

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