United States: Pre-Bid Due Diligence

IN TODAY'S MARKET, steel fabricators confront complex risks on a daily basis, including project uncertainty and increased market volatility. Now more than ever, it is crucial to devote time and attention to pre-bid due diligence—which, if done properly, will replace increased risk with increased profits.

But effective pre-bid due diligence is tedious and time consuming. At its core, it boils down to an examination of two risks: (1) the quality of project participants and (2) the quality of the contract documents. Here, we'll examine these risks and provide some guidance on how to identify them.

Design-Assist: What, Why—and Watch Out!

Design-assist is an emerging twist on modern project delivery methods, where the owner engages the construction team (prime contractor and key trade subcontractors) during the design phase to collaborate with the architect and engineer during the preparation of construction documents. It is intended to reduce the cost and time of construction, improve constructability and add value through the added expertise and insight of the prime contractor and key trade subcontractors. Under a design-assist contract, a fabricator's scope of work may be limited to design-assist services only, or simply be one additional component to the scope of an otherwise standard steel fabrication contract.

But as beneficial as this methodology is intended to be, it presents significant risk to fabricators. A fabricator's participation in the design process might expose the fabricator to liability for design errors and omissions—or prevent them from later making claims to recover additional costs resulting from design errors. To address this concern, fabricators should evaluate the sophistication and reputation of the other parties participating in the project. Fabricators should also closely examine the proposed contract and ensure that they are not exposed to additional liability for design errors. The design-assist contract must clearly set forth the obligations and liabilities of the construction team with respect to the plans and specifications so that there are no unintended consequences.

A fabricator should also assess the likelihood of scope and/or design changes, as well as schedule changes and delay. Where the design is novel and the initial contract documents are incomplete, special care should be taken. This can be a formula for unexpected changes to the character of the contract work. (For more on design-assist, see Section 9 of the AISC Code of Standard Practice for Steel Buildings and Bridges—ANSI/AISC 303, available at www.aisc.org/specifications—as well as "Design-Assist and the AISC Code of Standard Practice" in the February 2019 issue, available at www.modernsteel.com.)

Fast-Track Projects: Know Your Rights

Fast-track projects have become increasingly popular in recent years due to the clogged post-recession project pipeline. Fast-track construction is typically used where a project requires construction to begin before final design documents are issued. This allows owners to push projects to completion and generate revenue from the finished project as quickly as possible to take advantage of a strong economy. And let's acknowledge that there are many people in the construction world who are of the opinion that every project nowadays is a fast-track project.

But fast-track construction is not all gravy and can present a variety of risks that fabricators must consider, including budgeting, scope, design errors, change orders that alter the scope or character of the work and delays. The good news is that fabricators can translate the increased risk of the fast-track project delivery method into increased profits through due diligence during the bidding and contract negotiation process.

For example, a common issue with fast-track projects is the compressed project schedule. A fabricator should know that they can and should take exception to any schedule issues in the bid if it is not tenable from their perspective. Does the schedule include sufficient detail as to when final design documents will be available to the fabricator? If not, that issue should be addressed in the bid and the fabricator's contract. Fabricators should also ensure that the contract requires fabricator input on all future schedule changes and allows an equitable adjustment to the subcontract price if the cost of performance increases due to an accelerated schedule, delays in the issuance of structural design documents and specifications or delays in the review and approval of final shop drawings. Ultimately, a fabricator should not take the job if the fabricator is not confident in its ability to meet the fast track project schedule steel delivery dates.

Also note that Section 3.6 of the 2016 Code offers protection to fabricators if subsequently issued non-structural components of the design documents increase the scope of the fabricator's work. It states: "When the fast-track project delivery system is selected, release of the structural design documents and specifications shall constitute a release for construction, regardless of the status of the architectural, electrical, mechanical, and other interfacing designs and contract documents. Subsequent revisions, if any, shall be the responsibility of the owner..."

Ironically, fast-track projects are notorious for creating catastrophic delay problems—and these are sometimes blamed on the fabricator regardless of actual fault. Accordingly, it is important for fabricators to be aware of their legal rights. The following examples are legal defenses that may apply:

  1. Late steel delivery does not automatically entitle the owner to delay damages; if a steel delay is excusable (weather) or concurrent with an owner/general contractor-caused delay, you are not responsible for the delay
  2. If a delay is chargeable to the owner or prime contractor, you may be entitled to compensation (depending on your contract and applicable law.
  3. No damage for delay clauses are disfavored and void in many states, regardless be wary of no damage for delay clauses and demand it removed from the contract.

Incomplete Design Documents

Fabricators often _ nd themselves tangled up in disputes caused by incomplete design documents. Effective pre-bid due diligence is vital to effectively identifying and addressing the risks associated with incomplete or ambiguous documents. If faced with this situation, fabricators should provide notice of any design de_ ciencies discovered during the bidding process and get clari_ cation on those issues prior to submitting a bid. If that does not occur, they should include contingencies in the bid to address any issues with the design documents. For example, a fabricator should clarify the scope of design assist work (if any), payment, use of allowances or unit prices, etc.

It is also important to remember that fabricators are entitled to reasonable and accurate design documents. For example, the AISC Code requires complete, released construction drawings before detailing begins— even on fast-track jobs. Further, Section 1.5.1 states that a "fabricator is not responsible for the suitability, adequacy, or building code conformance to the design." Also, Section 3.1 states that "structural design documents shall clearly show work to be performed, including: size and location of members, geometry and work points, and more."

In reality, design errors are often not apparent during the bidding process and must be addressed by change order during the fabrication process. Fabricators should properly document all errors discovered and immediately notify the structural engineer in accordance with the contract documents. Please note that Section 3.3 of the Code states: "It is not the fabricator's responsibility to discover discrepancies, including those that are associated with the coordination of the various design disciplines." In addition, fabricators should consider midproject peer review to protect against these types of errors. Mid-project peer review is a process by which a third-party structural engineer or architect conducts a thorough examination at a chosen point during the project. This process provides added insurance against errors and related liabilities.

The Law of Contract Formation

It is vital for fabricators to have a basic understanding of the law of contract formation. It is not only a shield that protects against liability, but also a sword that can be used to create favorable contract terms for fabricators. The four essential elements of contract formation include: offer, acceptance, consideration and mutual intent to be bound. In a perfect legal world, no fabricator would ever begin work without a fully executed contract. However, common business practices do not always align with an attorney's armchair view of the world. Contrary popular belief, both parties do not have to sign on the dotted line to form an enforceable contract. A fabricator's offer (including terms favorable to the fabricator), notice to proceed with fabrication and commencement of work (or "beneficial reliance," such as mobilization, scheduling shop time or purchasing materials) can be sufficient to create an enforceable contract under most circumstances.

Fabricators should be aware of caveats and exceptions to protect against forming a contract without intending to do so. One example is that a fabricator can qualify their bid on a private project upon acceptance of favorable terms and conditions. Similarly, on public projects, fabricators can take exception to any conditions added by the prime contractor that are not included in the public bid solicitation—e .g., advanced acceptance of the prime's standard form subcontract.

Fabricators often wonder whether they are required to use the prime's standard form subcontract. The answer is generally no, unless the subcontract has been specifically incorporated into the bid documents and the fabricator has not taken exception to any of the subcontract's terms. It also important to know that prior use of a form subcontract with a prime contractor does not bind you to use it in a subsequent contract with the same prime.

Form contracts issued by owners and prime contractors often contain what we lawyers refer to as "killer clauses." A killer clause is one that is onerously one sided in the favor of the other party and attempts to force a fabricator to take responsible for risks that the fabricator cannot control. These clauses take many forms and commonly include provisions such as pay-ifpaid clauses, advanced waiver of mechanic's lien rights, no-damage-for-delay clauses and broad form indemnification clauses that require fabricators to indemnify against damages caused by another party's negligence. A fabricator or their attorney should always be on the lookout for these types of clauses during the bidding process if possible. In some states, they may be illegal and unenforceable, but you should not rely on a judge or arbitrator to declare these types of provisions unenforceable in the future. Instead, you should take exception to these clauses during the bidding process and negotiate for fair contract terms. At a minimum, prime contractors will often agree to slight modifications to their standard contract terms that will reduce your risk exposure. For example, a fabricator could at least modify the contract to preserve their ability to file a lien or assert a bond claim, regardless of owner non-payment.

As a fabricator, you do not have to know everything about contract law. However, you should consider identifying killer clauses a crucial component of your pre-bid due diligence. If you identify and address legal red flags before an issue arises, you can place yourself in a much better position to mitigate risk and maximize your profits on every project.

Originally published in Modern Steel Construction, American Institute of Steel Construction, March 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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