The Devil is in the Details, and the Profit is in the Claims Process

By David Tayman

With contractor bids for the Silver Line Phase II project required to be submitted by the end of the day on Friday, April 19, citizens groups, unions, and other interested parties are beginning to ramp up their criticism of the Metropolitan Washington Airports Authority’s intention to award the contract to the lowest bidder among five pre-qualified contractors.  The Silver Line Phase II project is a massive, $5.5 billion rail extension to Dulles Airport and Loudon County, Virginia.  Construction on Phase II is expected to begin in 2013 with a targeted completion date in 2018.

While no one can dispute the goal of completing a construction (or really any) project for the lowest possible cost, the practice of awarding contracts solely or primarily on a lowest cost basis creates incentives that may put the contractor and the owner at odds.  While this practice will cause potential bidders to compete to be cheapest, which seems good on its face, it may break down during the change order and claims process which inevitably occurs at the end of a large project.  The contractual difficulty of replacing a contractor at the tail end of a project may create an incentive for the contractor to lowball the bid with the anticipation of getting payment, and profit, out of the job in the form of back end change orders and punch list items.

There are several things an owner or prime contractor can do to try to minimize the incentive for this kind of activity.  The owner or prime contractor can require bidders to be pre-qualified pursuant to some set of criteria other than low cost.  Examples range from requiring contractors to have successfully completed a certain number of similar projects in the past, to imposing minimum financial stability requirements on the contractor, to requiring a bond or even a bond for a contractor to be allowed to bid.  The owner or prime should take care to be as specific as possible in fashioning the scope of work for the project; the more detailed the conditions in the contract are about the work product expected of the contractor, the less room there is for reasonable (or unreasonable) minds to disagree on what constitutes full or partial performance.  The owner or prime should also allow for an adequate study period so all qualified bidders have a full and complete opportunity to evaluate the scope of work and the work that will be required to perform given that scope and the physical conditions and other constraints under which the project will be completed.

However, we cannot forget that construction projects, particularly large municipal construction projects, are very complex, logistically and environmentally challenging operations and that even with the best laid plans and the best intentions things can and do go awry.  Unanticipated site conditions, so-called acts of God, the cumulative effect of ordinary course delays and errors, and just plain snafus are a regular part of the construction process and often lead owners and primes to ask contractors to do more than might have originally been contemplated to make sure the project is completed as originally envisioned.  Depending upon how the contract is drafted, and upon the equities of the situation, a contractor who follows the owner’s or the prime’s directions in this regard deserves to be compensated for the additional work and should not be seen as some sort of bad actor.

Effective legal representation is important in these situations.  Both contractors and owners should look for a lawyer who can not only understand and interpret the contract in light of the law and the parties’ course of dealing to date, but who is also familiar with the dynamics of the construction process.  While contractors and owners should engage an attorney ready and able to litigate the matter, contractors and owners should also look for an attorney who understands when litigation is appropriate and when it isn’t. An attorney with this balanced approach will have the ability to coach his client in dealing with the other side so that no rights are waived and the chances for achieving the client’s goals outside of litigation – and therefore more economically – are maximized.  Finally, this attorney has to have the judgment to know when he or she needs to step in and take over the dialog on behalf of his client; and he needs to have the advocacy skills to persuasively make his client’s case, first with the other side and then before a judge, mediator, arbitrator, or other adjudicator if things get to that point.

The Metropolitan Washington Airports Authority appears to have taken significant steps to prequalify bidders to maximize the chances that the Silver Line Phase II project will be a success, both from a project and a budget perspective.  However, with a project of this scale, complexity, and timeframe, it is all but certain that there will significant bumps along the way and that the owner, contractors, and subcontractors will have to be at the top of their game to respond to these complications, both in order to get the project done, and in order to make sure that the economics of the project work out as they should.  As they say, claims will be made.