March 12, 2019

Lawyers’ Usefulness in Construction — Template Manacles

Charles W. Cobb

Modern technology can show what is actually happening on jobsites, with progress measured against the plan, and this should make the business of building better – if contracts and insurance terms would allow people to collaborate. Changes in technology and construction industry practices will require attorneys to adapt the agreements and advice they put forward.

As construction workers find more uses for the tools of modern technology, sensors and cameras simplify innovative construction information sharing and collaboration. Information has moved from clipboards to spreadsheets to servers to the cloud, from private to exposed, and the drive to collaborate has increased.

Yet lawyers fight the rear-guard action counseling resistance to change.  Construction attorneys maintain contract templates highlighting the risks of sharing.  Lawyers and insurers want things to default to their forums and blame attribution rules. Unchanging practices threaten the relevance of the legal and insurance industries. 

Historians have a theory that lived experiences frame and cage the ability to understand and describe events of other times. Lawyers set the terms of construction contracts but cannot see the constraints of the templates they put forward.  Three examples of outdated construction forms are additional insured risk transfer, time lapse payment, and generally punitive downstream requirements.

Adaptation to incorporate collaboration between parties involves uncertainty that lawyers and insurers cannot imagine their systems handling.  Cooperation is untested legally but practiced daily on most jobsites. Technology will bring about efficiencies despite the resistance.

The old forms and modern practices are mismatched.  Updating the forms can enable evolution of the ways to perform construction work.

Disjointed Construction Risk Transfer

Transferring risk on construction sites involves vestigial paper-based ways. Now, the process involves chain communication, the scrutiny of arcane endorsement wording matched against the allegations of a claim, with a look back to the parties’ agreements, with too-often uncertain results.  When disputes arise over claims or denials of coverage, lawyers, judges and arbitrators are added to the fray.   A leaner, less fractured system to ensure the lower tier parties' compliance with the higher tier parties’ insurance requirements, according to their agreement, should be achievable. Reform is thwarted by the fact that the situation is not merely confusing, it is also boring – until there is a live claim to be dealt with.   Underwriters empowered to grant coverage should communicate directly in a private cloud with parties demanding the special cover.

You Cover Me

Currently, the subcontractor, – whose insurance will be expected to answer for claims against higher ups, purchases its insurance policy annually through a broker from a carrier.  Next, the subcontractor signs the construction manager’s or general contractor’s standard form subcontract for a specific project.  That subcontract will require that the sub indemnify both the construction manager and the owner for claims from the subcontractor’s work.  It will include separate insurance requirements, including additional insurance status specifications and the terms and conditions for it. The subcontract will typically also refer to obligations of the contract between the owner and the construction manager, which subcontractors only get to look at, in redacted form, by making a special request.

Coverage Per Accord?

Before the subcontractor can mobilize onsite, it must arrange, through its broker, with its general liability carrier’s underwriter to produce a special endorsement form naming the construction manager and owner as additional insureds on the subcontractor’s general liability and umbrella policies – according to the terms of the subcontract. Typically, the subcontractor’s coverage must be primary, it must not reach the other parties’ insurance until all the sub’s coverage is exhausted, and it must extend coverage beyond the time of substantial completion.  The subcontractor transfers this form listing additional insured parties and some of the terms to the construction manager’s team, which needs to examine it for verification and permission to start work.

This word matching exercise between what is required and what is produced, gets truly verified (and often fails) only when a claim comes in against the owner or the construction manager. They demand that the subcontractor instruct its insurer to protect the owner and/or the construction manager.  By tendering the claim with a demand for a defense, everyone checks to see if what was asked for was given, and if what was claimed is covered, by what was asked for.

Coverage With Conditions

Meanwhile subcontractors’ insurers have hunted for strategies to retract or restrict the grants of coverage to additional insureds using exclusions, exceptions to exclusions, wording changes on the standard additional insured forms, and with reference to each state’s anti-indemnity statutes.  For instance, the additional insured gets only what the named insured is required to give by the written contract.  This whole conversation wants to be held just between the contract drafter and the subcontractor’s insurance underwriter.

Adding Insureds Now Involves Too Many Touches

This systemically disunited process calls for arcane expertise few project teams have or want to have. People who are busy putting up buildings now have to analyze the nuance of manuscripted text; they are involuntary intermediaries in a conversation between the one demanding coverage and the one empowered to grant it.

This cries out for modernization; lawyer’s contracts and insurer’s forms are the problem. The demand for coverage should be parked in the cloud. Underwriters empowered to grant such coverage should communicate without intermediaries.  Business decision makers can be involved only when needed.

Payment Latency

Lawyers have lived with the payment terms of contract forms in use for decades. By custom and practice, subcontractors perform work first and submit their requisitions to general contractors, who combine all trades’ invoices into one monthly requisition for the owner to review and pay within a few weeks after reviewing and approving the requisition.  This traditional process assumes that verifying observable, physical work and material placement must be summarized and reduced to paper.  The time lag between the performance of work and the visualization of it has shortened to moments with cameras and cloud storage. 

Contracts insist that parties report to each other about the project status, about what has been done. Available technology can verify delivery of components, installation of materials, numbers of workers and progress.  If less time were spent reporting what has happened, people could devote more time to planning for what is going to happen.  Determining what has been delivered or installed and how it matches or departs from the plan is the important question. 

Contracts could be written to trigger payment after numerous tiny milestones, like letters of credit.  Once an event has provably occurred, such as materials delivered to the site or curtainwall installed to a certain floor level, payment is due.  The trigger need not be the consent of either party, or the writing of a check. 

Holding another party’s money does motivate compliance with the contract requirements and with other extra requests issued by the money holding party. Implementing more of a pay-as-you-go system would reduce the examples of human nature’s instinct to exercise undue domination inherent in holding others’ money.

Owners would howl at the idea of losing the leverage that comes from holding or granting release of payment for weeks of work.  How many legal disputes spring from the moral hazard inherent in owners and contractors holding money for work already performed?  The monthly requisition clearinghouse system needs updating using modern technological tools. Even in the days when banks closed their doors at 3:00 pm they settled accounts daily. 

Manpower Shortages - The Fault Of Contracts?

Construction is not attracting enough young people. Women are disproportionately missing from work in construction. While there is a construction manpower shortage there is no shortage of men in power.  Perhaps the ways people act, according to the contracts, contributes to an environment repellant to many people’s fundamental temperaments.  

Construction people are expert collaborators. They literally put things together, together.  The forms and agreements put forward by lawyers and insurers weaponize relationships making adversaries out of everyone working together on a project.  Actors operate from within walls of trade, profession, and expertise representing separate fiefdoms where each has a profit motive distinct from the success of the project.  On good jobs, everyone is profitable to some extent.

Current contracts often foist all risk onto one party or another, usually the one farthest downstream in the weakest position and with the least leverage. Dominant parties in one sided deals often express the intention never to take the signed agreement “out of the drawer,” recognizing its practical unworkability.  The power to declare another party in default for any miscue is more helpful as a threat than as a tactic to engender the mutual hunt for a solution that achieves the project’s goals.  

Selling Hope, Buying Reality

Contracts commit sales talk to written promises.  People who hope to land big construction projects make hopeful statements about the budget, the schedule, and their capabilities.  People who award construction contracts often find that, despite the promises being locked in as contract duties, some things just take more money and time to accomplish. 

Strictly worded contracts can put over-promisers on the hook, but they will hunt for every slip to use whatever contract leverage exists to recapture their costs and as much profit as they can get.  Some will always want the stage set for a shoving match of “contract gotcha,” but not everyone wants to work that way.  Continuity and completion militate against owners triggering “do or die” provisions against contractors in the middle of a project.  Contract penalties are only one way to address the problem of credulous owners’ belief in sweet talking sales pitches.

Parties are now incentivized to attribute all fault to others, rather than to work together to anticipate and plan around delays. A wider array of workers might find newer work settings more amenable to their collaborative tendencies.

Data To Shrink Contingencies

Subcontractors give a hard-bid lump sum price that includes risk contingencies that could be dealt with differently under a different sort of contracting and use of modern data gathering.

For example, the cost of weather delays is allocated by contracts before the event and these costs are built into contingencies. Setting the trigger incorrectly could decrease or eliminate one party’s profit on a job or lead to much fatter margins.

Information about actual conditions is available.  Visualization of the actual impacts is too.   If the team were aligned, if the contract did not allocate weather risks punitively, the weather measurement would be exact, the impacts determined in real time and the risk of weather cost surprises could even be hedged through insurance. Similar contingencies for estimated material price swings are built into most existing contracts. Available supply chain technology now used in retail can track fabricated goods.

Construction contracts could address how the team would work around realities rather than possibilities. Allocating all the risk to a lower tier party may not be the best.

People in construction have the tools and see the ways to work differently. If only lawyers and insurers would create agreements to get the best of collaboration, the likely result would be faster construction and more profit for all.

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Charles W. Cobb

Silver Lake Legal, Newton MA, Division 4