Colorado-Real-Estate-Journal_372210

Page 26 - November 15-December 5, 2023 www.crej.com Syndications Entity Formation Leasing Construction Financing Land Use Water Law Foreclosure Litigation Dispute Resolution Oil and Gas Contact: Jonathan Goodman or Britney Beall-Eder www.frascona.com | jon@frascona.com | britney@frascona.com 4750 Table Mesa Drive, Boulder, CO 80305 | (303) 494-3000 Law & Accounting EDITOR’S NOTE: This is the second part of a two-part series on allocation in construction subcon- tracts. The first part appeared in the Nov. 1 issue. This part covers four additional critical subcontract clauses for risk allocation between a general contractor and subcon- tractor. n Site investigation. Subcon- tracts should require subcontrac- tors to conduct a site investiga- tion, assess site conditions, and report concerns to the general contractor before signing the contract or commencing work. These site conditions can affect project cost or duration. Exam- ples include limited storage or staging space; availability of labor, water, power or access; topography; and legal restric- tions such as limitations on working hours. If a subcontrac- tor is not specifically required to investigate the site, the gen- eral contractor may bear the risk that the subcontractor may later claim increased costs or time extensions. n Differing site conditions. Differing site conditions are physical or other conditions at a construction site that were unknown when the subcontract was executed. Examples include a high water table, expansive soils or other subsurface con- ditions, and characteris- tics of exist- ing structures on the site. A differing site condi- tion clause a l l o c a t e s risk regard- ing changes in scope of work, and cost and time to execute the proj- ect. A subcontract’s differing site conditions clause typi- cally allows the subcontractor to request an equitable adjust- ment to price and/or time. This departs from common law where subcontractors must meet the requirements of the subcon- tract even with unforeseen dif- ficulties. To compensate for this unknown risk, prudent subcon- tractors will include contingen- cies in their bids. The differing site conditions clause gives the general contractor the benefit of a lower base bid price that does not include contingencies. When deciding on a differ- ing site condition clause in a subcontract, the general contrac- tor must determine if the gen- eral contract has such a clause. If it does not, the clause should not be included in the subcon- tract, or the general contractor should require a corresponding clause to be included in the gen- eral contract. Otherwise, the risk shifts from subcontractor to gen- eral contractor, and the general contractor cannot pass the risk through to the developer. Also, the general contractor should consider the subcon- tract’s site investigation clause and its precise terms. The site investigation clause puts the risk of many – but not all – unfore- seen conditions on the subcon- tractor, while the differing site conditions clause could put the risk on the general contractor. The outcome of this apparent conflict would depend on the facts and circumstances and any relevant precedents. The gen- eral contractor should avoid this uncertainty by stating in the site investigation clause, discussed above, that it applies regardless of other provisions in the sub- contract. n Incorporation by reference – flow-down. The incorpora- tion by reference concept essen- tially means that certain rights and obligations of another con- tract or document are included in your contract. These “flow- through,” “flow-down” or “con- duit” clauses are commonly found in subcontracts. The risk here is that there are requirements of the general con- tractor in the general contract that are the functional responsi- bility of subcontractors. Exam- ples are complying with the specifications and the schedule, insurance and indemnity obliga- tions, and notice requirements among others. If a subcontract does not specifically require the subcontractor to fulfill these obligations and does not include a flow-down clause, the gen- eral contractor may be liable for breach of the contract without recourse to the subcontractor. Significant issues can arise from the specific language of the clause. One such issue is mutuality (i.e., flow-up as well as flow-down). Another con- cern is whether the clause flows down all obligations of the gen- eral contractor under the general contract – including administra- tive requirements, liquidated damages, arbitration, indemnity, deadlines for notices and more – or is limited to the scope, quality, character and manner of the sub- contractor’s work. If the general contractor wants the subcontrac- tor to be bound by all provisions of the general contract, the gen- eral contractor should assure the clause explicitly so provides. Of course, the subcontract itself should specifically address these requirements. However, conflicts may arise between the subcontract and the general contract. The flow-down clause should include a sentence – called a precedence or primacy clause – to specify whether the general contract or the subcon- tract prevails in case of inconsis- tencies. n Notice. Construction sub- contracts typically require that the subcontractor provide writ- ten notice to the contractor of circumstances that may lead to a claim for additional money or time. The clause should be very specific about the timing and content of the notice. The rationale for the notice requirement is that the notice gives the general contractor the opportunity to evaluate the conditions encountered and the option to consider changes to minimize or avoid extra costs and time, and to get the devel- oper and the architect involved as appropriate. Failure to give notice as required can result in denial of the subcontractor’s claim. Jurisdictions vary on strict notice compliance. Disputes often involve constructive or Allocating construction risks through contract clauses J. David Arkell Attorney, Moye White Please see Arkell, Page 47