The Owner’s Game Plan for Managing Legal Risks in Construction

The Owner’s Game Plan for Managing Legal Risks in Construction

As construction activity continues to increase in today’s booming real estate market, so are the risks resulting from a strained skilled labor force and fast-paced production. With proper planning, owners can mitigate much of this risk by taking steps to avoid it, shift it to others, or insure against it.

From the outset, owners should conduct pre-risk assessments of proposed projects.  This can best be accomplished by retaining qualified consultants to advise on applicable zoning laws, building codes, and ordinances, including those governing noisy construction operations. They also should determine how to implement maintenance of traffic plans that will be accepted by government authorities. In tight geographic areas where tower cranes may hover adjacent buildings, it may be necessary to negotiate the use of air space.

At the contracting stage, it is important to implement contract clauses to help avoid and mitigate liability. This includes standard of care provisions that require design and construction participants to comply with all applicable building codes and ordinances, and strong indemnification clauses to put the risk of loss on those accountable for negligence during the construction process. There is a current trend to shift the risk to a single source for design and construction deficiencies through a design-build delivery system where the owners contract with design builders to deliver completed projects. This method helps minimize finger pointing among the design and construction participants that often occurs when delays and defect claims arise.

It is important to insist on liquidated damages to cover the costs associated with delay and provide monetary incentives for contractors to complete work in a timely manner. Retain design professionals with experience in building similar projects in the same locale. When the design documents have been prepared, require peer review by independent design firms to determine if critical life safety and building envelope issues have been addressed, including special treatment of potential areas where moisture intrusion may occur.

Lack of knowledge of Americans with Disabilities Act requirements can result in devastating delays and additional costs to redesign and modify construction to become compliant. Resist efforts by design professionals and contractors to include “mutual waiver of consequential damage” provisions in contractual agreements. In the event of consequential damages caused by their own faulty design and/or construction, these types of clauses could relieve them from liability for such damages and shift responsibility for such damages to the owners.

Dictate insurance requirements for all participants to the design and construction process – including commercial general liability, workers’ compensation, and professional liability insurance for design professionals. Endorsements and exclusions to the policies should be carefully examined. Hire qualified insurance brokers to find the gaps in the policies along with the endorsements and exclusions. For example, in some instances, policy exclusions may exclude “multi-family” construction for projects such as 300-unit condominiums. A recent trend involves obtaining insurance through an Owner Controlled Insurance Program that provides insurance for all participants under a single umbrella. In OCIP structures, the owners have more control over the insurance provided and pay premiums that often are less expensive than the premiums charged by the individual contractors and subcontractors that are ultimately paid by the owner.

Design and construction risk can often be mitigated with careful monitoring of the construction through webcam technologies installed at project sites. These technologies enable investors and management to remotely assess the pace of construction in “real time” and better understand scope changes and potential conflicts.  Qualified consultants can weigh in remotely to efficiently solve problems. These technologies also can provide photographic records that can be used to defend post-completion claims for defects and/or delays.

In past years, aerial photographs have assisted project teams in monitoring a construction project. But with the advent of unmanned aerial vehicles, popularly known as “drones”, accessing hard-to-reach areas without swing stages, cranes and scaffolding can now be accomplished in minutes. Equipped with high-resolution cameras and cutting-edge software, drones can be used to collect live images of construction in progress; perform bridge inspections and land surveys; verify equipment and manpower on site; and provide data to detect faulty construction before finishes such as waterproofing and stucco are applied. Site visits that once required aerial photographs, personnel site visits, safety considerations and a hard hat can now be done in a couple of hours. This technology provides another set of eyes to confirm the ongoing events taking place on a construction project. In addition, the photographs and video generated by drones and can used to later defend claims of improper and faulty construction.

Without a doubt, determining how to avoid, shift, mitigate, and insure against risk is critical for owners as construction continues to boom. These considerations should be part of the owner’s game plan for achieving success in development and construction.