Construction Contracts (Hinze)

Question 1

Contract

Answer 1

An agreement, usually between two parties, that is enforceable by law

Question 2

Executed contract

Answer 2

• Execute a contract = contract has been signed, parties are now bound to it.
• A contract is fully executed when both parties to the agreement have fully performed in accordance with the contracts terms (contractual obligations have been executed). (E.g. a construction contract is fully executed only after the contractor has satisfactorily completed the construction work in accordance with the contract documents, and the owners paid the contract for this work).

Question 3

Executory contract

Answer 3

When some portion of the agreement remains to be done, by one or more parties. A contract that is entirely executory on the part of both parties (neither party has performed the obligations of the contract) is easier to cancel than is one in which one or both of the parties have performed at least a portion of their obligations

Question 4

Bilateral contract

Answer 4

Consists of an agreement created by mutual promises made by the contracting parties. In this type of contract, each party plays two roles: promisor and promisee. (Most construction contracts are bilateral in that the contractor promises to perform the construction work as specified, and the owner promises to pay the stated amount for the work)

Question 5

Unilateral contract

Answer 5

A one-sided contract in that only one of the contracting parties makes a promise, while the other party exchanges something other than a promise, mostly commonly some stated performance.

Question 6

Express contract

Answer 6

One in which the terms of the agreement, whether verbal or written, are clear, concise, explicit, and definite.

Question 7

Implied contract

Answer 7

One in which the terms of the agreement are not clearly stated, but are established through inference and deduction. The facts and circumstances surrounding a contract must be evaluated before the mutual intent of the contract can be determined

Question 8

Elements of a contract

Answer 8

Must meet these criteria:

• An offer and acceptance
• A meeting of the minds
• Consideration
• Lawful subject matter
• Competent parties

Question 9

Offer and acceptance

Answer 9

• Offer = Made when one person signifies to another person a willingness to enter into a binding agreement on certain specified terms. This party (offerer) confers on the second party (offer) the power to create a binding contract by accepting the stated terms.
• Acceptance = Creates the contract, provided that it is made in the manner and at the time specified in the offer. Must be definite, unqualified, and unconditional, or it constitutes a counteroffer. Once a counteroffer has been made, the acceptance of the original offer is no longer possible without the specific approval of the original offerer.

Question 10

Meeting of the minds

Answer 10

The contracting parties agree on the basic meaning and legal implications of the contract. This is usually considered to be the underlying purpose of the contract.

Question 11

Consideration

Answer 11

Something of value received by one of the parties in exchange for another item or action that is of value. Both parties in the contract must obtain consideration or the contract is not valid

Question 12

Lawful subject matter

Answer 12

The subject must be definite and clearly defined, and cannot violate any fundamental dictates of common law or in contradiction to public policy.

Question 13

Competent parties

Answer 13

Anyone acting in good faith may enter into a binding contract, excluding minors, insane persons, and drunk persons (mentally incompetent)

Question 14

Estoppel

Answer 14

A principle by which a contract becomes binding in spite of the fact that no formal agreement was made between the parties concerned. Estoppel is essentially the result of a court action asserting that an agreement or contract exists, based largely on the behavior or actions of the parties involved (implied agreement). In other words, a contract may be created by what a party does or says, without a written document, and that party is then “estopped” from denying a contract exists

Question 15

Lien

Answer 15

A legal claim placed on property. It gives the party filing the lien the right to retain possession of the property until a debt payable is satisfied.

Question 16

Tax lien

Answer 16

A tax lien is the right of the government to retain possession of property until he tax on it has been paid. If the tax is not paid when the land is sold, the lien transfers with the land title to the new owner

Question 17

Eminent domain

Answer 17

The right of the federal government or a state or other public agency to take possession of private property and appropriate it for public use.

1. ) Property can only be taken by due process of law. Land owner must be given proper notice of the government’s intentions and that landowner must have an opportunity to make a case against the seizure of the property.
2. ) A landowner must receive fair compensation for land that is seized (which is often determined through judicial proceedings)

Question 18

Right-of-way

Answer 18

A tract of land, usually consisting of a series of connected parcels of property, that is used for the operation of a highway or public utility.

Question 19

Zoning

Answer 19

The division of real property, especially in larger cities, into classifications of use; each area receiving a particular designation regarding the use of property or land within it. Zoning requirements are essentially the master plan of a city to regulate the use of the land in each area or community.

Question 20

Mechanic’s lien

Answer 20

A right created by law that permits workers and materials suppliers who provide improvements to real property, to place a claim on that land if they are not paid. This claim initially consists of filing the formal papers which secure for the worker or materials supplier a right to the property until the debt is paid. Public property is not subject to liens.

Question 21

Agency agreement

Answer 21

A consensual contractual relationship consisting of a principal and an agent. The principal authorizes the agent to represent the principal in certain specified business dealings with third parties. The agent’s authority must come from the principal, and the agent is appointed to act for the principal in transactions with third parties and is authorized to do only what the principal wants. The principal is liable for all contracts made by the agent while the agent is acting within the scope of the granted and stated authority.
Termination:
- Can be termination unilaterally by either party
- death of either the principal or the agent
- destruction of the subject matter for which the agency was formed
- fulfillment of the particular purpose of the agency
- bankruptcy of either party
- expiration of a time period set in the agreement
- mutual consent

Question 22

Contingent liability

Answer 22

An injured third party (not an employed worker) is not or should not be affected by a contract between two other parties. On a construction site, an injured third party can sue the owner under the premise that the owner is jointly or wholly liable.

Question 23

Day labor agencies

Answer 23

• Used by contractors and subcontractors to fulfill short-term labor needs, especially where lower skill levels are needed.
• Day labor agency is responsible for paying wages, insurance, taxes, training, and providing safety equipment. Contractor provides instruction about work to be performed

Question 24

Independent contractors

Answer 24

Unlike agents, independent contractors are held solely accountable for their actions and holds the liability for work performance. Independent contractors can become employees if they are supervised, transferring the liability of work to the supervising entity. In order to maintain independence, such workers should be “observed” rather than “supervised,” and must maintain a level of control over the task being performed and its process.

Question 25

Statutory employees

Answer 25

A designation of employees that places them somewhere between regular employees and independent contractors. They maintain a degree of independence while working, and are not directly supervised. Applies to four typical occupations: full-time life insurance salespersons, agent drivers and commission drivers, traveling or city salespersons, and homeworkers. Statutory employees can become common-law employees when a high degree of control is exercised over them.

Question 26

Proprietorships

Answer 26

Firms owned by an individual, who is personally liable for any incurred indebtedness. In the eyes of the law, the individual and the firm are the same. Such a business can be discontinued at will at any time.

Question 27

Partnerships

Answer 27

An association of two or more persons to carry on a business. In general, the partners will have joint control of the firm since their resources have been joined. A partnership pays no income tax, and is not considered a separate legal entity apart from the individual owners; the partners must pay income tax on the salary earned plus a prorated share of the profits that were left in the company. Partners remain as individuals under the law, although each partner is an agent for the other partners – sharing liability, and contracts entered into by one partner obligate all other partners. Each partner has unlimited liability to creditors for the full amount of al debts of the partnership.

Question 28

Limited partners

Answer 28

Generally contributes property or cash to the business (partnership) and shares in the profits and losses. However, a limited partner provides no services and has no vote in matters of management. This partner’s liability for partnership debts is no greater than the amount of the investment made in the firm.

Question 29

Silent partners

Answer 29

A person who is a partner in a firm but remains unknown to the public. This partner cannot be active in management of the regular business affairs of the company.

Question 30

Dissolving a partnership

Answer 30

Can be dissolved by several means, including:

• The death of a partner = automatic dissolution of the partnership
• Bankruptcy
• A duration provision in the articles may stipulate a time period after which the partnership will automatically be dissolved
• The mutual agreement of the partnership that it should cease to exist
• One of the partners is judged to be insane
• One of the partners decides to withdraw
• A court degree of dissolution
• Expulsion of a partner for just cause

Priority with which debts of the partnership will be paid if it dissolves:

1. ) Outside creditors
2. ) Repayment of loans or advances to the partnership made by any of the partners above the capital contributions in the articles of partnership
3. ) Return each partner’s capital investment
4. ) If anything is left, the profits are distributed according to the partnership agreement

Question 31

Joint ventures

Answer 31

A special form of temporary partnership, joint ventures are essentially the combined efforts of two or more firms to reach a goal or complete a project. Joint ventures dissolves when the project is completed. This is a popular method for two or more smaller companies to successfully compete against giants in the industry, as it allows them to share risks, resources, and profits.
One of the partners must be designated clearly as “sponsor” and spokesperson for the joint venture.

Question 32

Corporation

Answer 32

A legal entity (artificial tax-paying individual) created to act as an individual while protecting the owners and stockholders in the firm. A corporation is owned by one or more individuals who form an independent body or unit under a special or corporate name. It is a private business organization that limits the liability of its owners (stockholders); the owners are at risk only to the extent of their investment in the corporation. The owners pay income tax only on the profits actually paid to them. Typically has a board of directors that were elected by the owners to manage the corporation and act as its agents.

Question 33

Holding company

Answer 33

A “super corporation” that is created to hold such a dominant interest in one or more other companies that it can prescribe, through its voting power, the management policies of those other companies. It is essentially a big stockholder, as such, it has the normal rights and privileges of individual stockholders.

Question 34

Subchapter S corporation

Answer 34

S corporations are like typical corporations in that there is limited liability for shareholders, but it generally does not pay income taxes as a separate legal entity. S corporations are also referred to as incorporated partnerships. All company profits are taxed directly to the shareholders. Since the S corporation earnings are not taxed prior to distribution to the shareholders, there is no double taxation as is common for typical corporations.
S corporations can distribute more of the earnings than is typical in a regular corporation.

Question 35

Torts

Answer 35

Torts are disputes that relate to matters not addressed by statutory law or contract obligations. Torts are civil wrongs committed against others that do not involve contracts. A tort can result from a specific action or can be caused by failure to act. For a tort to occur, the following conditions must be met:

1) One party owner a duty to another party
2) That party does not conform (breach in the performance of that duty) to the standard
3) The second party is harmed by the act or failure to act
4) There is a clear causal relationship between the act and the harm that resulted

Torts can arise from damage or injury caused by failure to act within the proper standard of care (conduct that is expected of someone acting in a given capacity). The issue of negligence also arises in many tort cases; negligence arises when a legally protected interest is overtly invaded or violated in some way

Trespass violations are torts (see attractive nuisance).

Question 36

Attractive nuisance

Answer 36

Often applies for minors gaining access to construction sites and harming themselves. Conditions of attractive nuisance apply when:

1) The party controlling a piece of property should know that children are likely to trespass
2) The party should realize that there is an unreasonable risk or death or serious injury on the site,
3) The children, because of their age, will probably not recognize the risk involved
4) the party could reduce the risk with a small effort by keeping the children out or by reducing the dangerous situation

Question 37

Surety bond

Answer 37

Acquired by a contractor if required by owner, a guarantee provided by a third-party firm that states the contractor will fulfill the terms of the contract. If the contractor defaults on the contract, the surety will then be obligated to satisfy the terms of the contract. The arrangement includes three parties:

1) Surety (the bond company) –obligated to perform or to pay a specified amount of money if the principal does not perform (guarantor on the bond)
2) Principal – the party (general contractor) whose performance is promised or guaranteed
3) Obligee – the party (owner) to whom the promise of the principal’s performance is made. The obligee is the beneficiary of the bond.

General contractors may require subcontractors to obtain surety bonds, minimizing the risk of subcontractors defaulting on their work (in which case the GC would be the obligee and the principal would be the subcontractor)

Question 38

Insurance policy (vs. surety bond)

Answer 38

A two-party instrument between the insurance company and the insured that protects the insured from a specified type of loss. In a surety agreement, the contractor is not providing the guarantee for himself, but for the owner. The surety is more like a bank than an insurance company. If the contractor defaults and the surety is obligated to perform, the surety can seek reimbursement from the contractor because the contractor indemnified the surety. If the contractor default can be shown to be due to a particular party’s actions, the surety has the right to seek compensation from that party.

Insurance covers specific losses, while a surety bond is for losses of any kind, for those guarantees given, for example, performance and payment. Insurance transfers risk, whereas a surety agreement does not.

Question 39

Surety underwriting

Answer 39

Surety underwriting procedure (rating the acceptability of risks being solicited) is usually so carefully performed that many owners disregard the need for prequalifying bidders, since unqualified contractors would be unable to obtain a surety bond; bonds are a guarantee against unqualified and unscrupulous bidders.

Question 40

Bid bond

Answer 40

Issued to give assurances that the contractor will enter into a binding construction contract and will provide the required payment and performance bonds if the contract is awarded to him. If the contractor fails to do this (sign the contract or furnish the required bonds), the bond stipulates that a responsible party (the surety) will pay the damages. The face value of the bond (penalty) is usually set at 5-20% of the contract amount.
The bid bond of the low bidder becomes null and void when the construction contract is signed and the payment and performance bonds are posted. The bid bonds of unsuccessful bidders are returned as stated in the instructions to bidders (generally after the contract is signed).
If the low bidding contractor fails to enter into a contract, the bid bond may either be redeemed as forfeiture of the face value of the bid bond or as the difference between the low bid and the second low bid, as determined by the actual wording of the bid bond.

Question 41

Performance bond

Answer 41

Assures that a financially responsible party will stand behind the prime contractor if he does not perform properly. These bonds usually state a specified dollar amount as a limit to the liability of the surety, more commonly referred to as the bond’s penalty. This is not an absolute guarantee that the project will be built as specified for the contract price, but that the surety will back the contractor to the limit of the face amount of the bond (which is usually 100% of the contract price).
The performance bond and payment bond are considered valid for the life of a contract. This protection period extends through to final acceptance by the owner, and generally extends through the one-year warranty period.
The surety should be informed of any changes (change orders, etc.) that increase the contract sum. Performance bonds usually contain provisions that permit the surety to remedy the default and complete the construction contract itself, or to pay the owner to complete it, up to the limit of the bond.

Question 42

Payment bond

Answer 42

Gives protection to the owner if the subcontractors and suppliers are not paid by the prime contractor. Payment bonds prevent liens. With the added assurance of being paid, the subcontractors are more inclined to bid and bid lower for their work.

Question 43

Bonding capacity

Answer 43

The amount dictated by the surety providing bonds which limits the maximum value of uncompleted work that a contractor can undertake at one time. This level or limit is based on the surety’s appraisal of the contractor’s abilities and resources. A conservative rule is that the bonding capacity is about $10 of uncompleted work for each $1 of net working capital, depending on job size.

Question 44

Contractor default

Answer 44

When a contractor defaults, the surety generally has three possible options to follow:
1) Surety provides financial support to the defaulting contractor in order to expedite the completion of the project, with the surety to be reimbursed later (this is the most common option taken)
2) Surety solicits bids or quotes from other contractors to complete the project
3) Surety informs the owner to finish the project (not a common option)
Essentially, when a contractor defaults, the surety is asked to step in for the contractor to complete the work or pay the owner to do it. The surety must perform under the bond, but the surety has several lines of defense and try to recover their losses.

Question 45

Advertising for bids on public works projects

Answer 45

1) Notice must be given to interested and qualified members of the construction community in advance of the bidding. Notice of bids must be placed in newspapers, magazines, trade publications, etc. Information commonly included:
- Nature or type of project
- Location of the project
- Type of contract for construction
- Bonding requirements
- Dates in which to perform work
- Terms of payment
- Estimated construction cost
- Time, manner, and place to submit bids
- Location to obtain bid documents
- Deposit required on bid documents
- Owner’s right to reject any and all bids
- Requirements regarding wage rights
2) Invitation for bids must be posted in public places and distributed among the local construction community
3) All bidders must be treated alike and be afforded an opportunity to bid under the same terms and conditions
4) Prequalification may be required

Question 46

Advertisements for bids in the private sector

Answer 46

1) Owner may select a contractor by any means
2) Public advertising is frequently used to obtain advantages of open and free competition
3) The owner may elect to negotiate a contract with a particular contractor
4) Most common approach is for the owner to select a few prime contractors who are reputable and capable of doing a good job. This list of contractors is called a select bidders list. These contractors are asked to bid in a process called invitation bidding. This process has the advantage of the competitive market while restricting bids to a selected group of contractors

Question 47

Value engineering

Answer 47

Value engineering refers to a specific procedure that is carried out to critically analyze the various aspects of contract documents in relation to the owner’s objectives, to determine if alternative methods or materials might be more appropriate. A value engineering review on a project may result in a variety of changes in the contract documents that may reduce costs, improve or maintain project quality, and/or decrease the duration of construction. It essentially relates to reviewing the contract documents with the owner’s best interest in mind, and may include elements such as delivered cost of a project, the costs of maintaining a completed project, the ease and duration of construction, the probability of disputes or litigation, etc.
Value engineering can occur either in the design phase by an impartial third party consultant (for a fee), or during the construction phase by the contractor who was awarded the contract (generally compensated by sharing any savings with the owner). The construction phase review is more biased, as the contractor will generally be more oriented to suggesting less expensive means of constructing a project, even though more expensive installations may result in lower operating or maintenance costs.

Question 48

Constructability review

Answer 48

An assessment of the construction documents, prior to the bidding phase, to identify problem areas and suggest improvements. The reviews should be conducted by the design team as the contract documents evolve.

Question 49

Bid form

Answer 49

Bid documents usually include a bid form on which the bids are to be submitted. This facilitates analysis and easy comparison of bids so that irregularities can be detected quickly.
Common requirements on bid forms:
- Price (lump sum or unit price)
- Time of completion (often given by owner)
- Bid surety
- Agreement to provide contract surety
- Acknowledgement of having reviewed addenda
- List of subcontractors used in the final bid
- Experience record, financial statement, plant and equipment inventory
- Declaration regarding fraud and collusion
- Statement regarding site examination
- Signature

Question 50

Project manual

Answer 50

Consists of the bidding documents, general conditions, supplementary provisions, and the technical specifications.

Question 51

General conditions

Answer 51

Often referred to as the boilerplate, the general conditions augment the construction contract and outline the rules under which the project will be built. This establishes the rights, authority, and obligations of the contracting parties: the owner, the owner’s representative, and the contractor. Standard general conditions have the advantage of being familiar to all parties, and the wording is clearly understood, which saves time and effort in drafting general conditions. Standard general conditions have also been court-tested so their legal interpretation is known.

Question 52

Supplementary conditions

Answer 52

Also known as special provisions or conditions, these are more specific for the job being constructed. Topics addressed include:

• Which materials the owner will provide
• Specific information about materials substitutions
• Changes in insurance requirements
• Construction phasing requirements
• Examination of the site
• Construction start date and job schedule requirements
• Job site security requirements

Question 53

Specifications

Answer 53

Broadly used to include all contract documents, with the except of the drawings. Includes the following:

• Invitation to bid
• Instructions to bidders
• General Conditions
• Supplementary conditions
• Bid proposal form
• Bid bond form
• Contract bond form
• Technical specifications

Question 54

Technical specifications

Answer 54

Cover the qualitative items of a project (whereas drawings tend to cover quantitative items). Technical specs are written descriptions fo the quality of the various aspects of the construction project. Generally follow a standard format of providing the following information (e.g. CSI format):

• General: ground rules for the work to be performed, defines the scope of work to be performed within the specification section
• Product or products: describes the product or products (materials, equipment, accessories, components, fixtures) and the development and manufacturing process to be used in producing them
• Execution: describes the preparation, workmanship, installation, erection, and application procedures to be employed along with quality requirements and performance criteria that must be satisfied.

Specs are used to modify or clarify what is shown on the drawings.

Question 55

CSI Organization

Answer 55

Division of bidding and contract requirements (prebid information, instructions to bidders, bid forms, agreement forms, bonds and certifications, general conditions, supplementary conditions, drawings index, etc.)

Division 1: General requirements 
Division 2: Sitework
Division 3: Concrete 
Division 4: Masonry 
Division 5: Metals
Division 6: Wood and plastics
Division 7: Thermal and moisture protection
Division 8: Doors and windows
Division 9: Finishes
Division 10: Specialities 
Division 11: Equipment
Division 12: Furnishings
Division 13: Special construction
Division 14: Conveying systems 
Division 15: Mechanical
Division 16: Electrical

Question 56

Design specifications

Answer 56

(Or method and materials specifications, prescriptive specifications). In this type of specification, a particular kind or type of material is to be used, particular dimensions are required, the installation instructions are given, etc.
By using this type of spec, the owner warrants by implication that the spec will produce the desired results if they are followed by contractor. Thus the contractor is not liable if the desired end result is not obtained. The Spearin Doctrine states that the contractor is not liable for performance when the specification has been followed.

Question 57

Performance specifications

Answer 57

In this type of specification, the results or performance of the finished product, rather than the specific methods and materials used to construct the product, are specified. Therefore, the contractor is responsible for selecting the methods and materials, and if the selection proves to be inadequate, the contractor is liable and the work must be redone at the contractor’s expense.