(Jobs from Hell and How to Avoid Them)
By: Arthur F. O'Leary and James Acret
THE
FOOLPROOF CONSTRUCTION CONTRACT
An Attempt to Write a No-Extra Contract
Baker/Doyle was a thriving construction company, highly experienced
in the supermarket field. In addition to over 50 market projects
they had completed for customers, they had built and still owned 15
under their investment subsidiary, Baker/Doyle Properties. All 15
were on long-term leases to Frugalmart Stores, Inc, one of the more
stable retail operators. There was little that the partners, Abel
Baker and Charles Doyle, didn't know about supermarket construction.
The Frugalmart buildings were typically 150 feet by 180 feet, 27,000
square feet, with a generous loading dock area and a 135 car
landscaped parking area.
In early October 1992, Abel Baker had spotted a suitable piece of
recently cleared land, about 100,000 square feet, in a district
where Frugalmart was interested in locating. The real estate broker
readily disclosed the existence of several feet of old fill soil
over most of the site. This did not bother Baker/Doyle, as they
would simply dig a test hole at each of the four comers of the
proposed building location and allow for the estimated extra cost of
deeper foundations.
Upon obtaining permission to dig the test holes, they asked Ivan
Jenson, their excavation contractor, to send over a man and a
backhoe to sink the four holes. The site was more or less level and
they recorded the depths of fill at the four comers as 2 feet at the
NW comer, 5 feet at the NE comer, 3 feet at the SW comer, and 6 feet
at the SE comer. They logically assumed that it would be a straight
line, more or less, between the four measured natural earth levels.
After allowing for their estimate of extra foundation expense, the
land cost was still reasonable so they optioned it for 60 days to
allow time to finalize a lease with Frugalmart.
Negotiations with the leasing executive at Frugalmart resulted in a
satisfactory long term lease, so Baker/Doyle properties exercised
their option to purchase the property on November 23, 1992. On the
same day they visited and hired Flynn & Hill, Architects and
Engineers, who had designed all their previous supermarkets.
The partnership of Eugene Flynn, Architect and Gerald Hill,
Structural Engineer had a well-earned reputation for designing
attractive and economical supermarkets and their work was acceptable
to the major supermarket tenants. They were known among their peers
for design innovation and competent documentation.
At their first meeting with Baker/Doyle, Gene and Gerry insisted on
a boundary and topographic survey of the property and a foundation
investigation. Charlie Doyle said okay on the land survey but was
not keen on the soil testing. He rationalized, "We already know
about the fill and its depth so why waste good money on soil
testing?"
Gerry Hill advised, "If we don't have a soil test then we'll have to
assume that the maximum allowable pressure on the natural soil is
1500 pounds per square foot. But if we obtain a soil test it might
disclose a higher allowable value and you could save some money on
concrete and reinforcing."
Doyle said they had built on a similar site nearby and the soil test
substantiated a 2000 pounds per square foot value, "So let's use
2000 psf."
Hill replied, "No, Charlie, we can use only 1500 psf unless we see a
soil test. The Building Department will take the same position.
Although 1500 psf is fairly conservative, we'd be still happier with
a soil test." Charlie Doyle authorized the land survey but not the
foundation investigation.
So Flynn & Hill designed the building. Baker/Doyle was satisfied
with the design sketches and submitted them to Frugalmart who
promptly approved them. Flynn & Hill proceeded with the construction
drawings and specifications on December 15, 1992. On the foundation
plan and details they showed the wall and column footings extending
down through the fill soil and 18 inches into the natural soil. The
structural engineers used 1500 pounds per square foot soil pressure
for designing the footings. On the foundation plan they placed a
note saying: "All footings shall be founded 18 inches into natural
undisturbed soil. Minimum bearing capacity shall be 1500 pounds per
square foot."
Flynn & Hill was hired only for design, production of the
construction documents, and obtaining the building permit but not
for administration of the construction contract. Baker/Doyle felt
they could handle the contract administration themselves. After all,
they reasoned, they were experienced general contractors and it was
their own building. Field inspection or consultation, if any is
needed, would be on an as-called-for basis.
The architects and engineers worked diligently, finished the plans
and specifications, and applied for the building permit on February
15, 1993. It was issued on Apri12, 1993.
Baker/Doyle was quite busy at the time with three supermarkets and
two warehouses then under construction, tying up their best
superintendents. They didn't feel they could do their own job
justice and complete it on time to satisfy their commitment to
Frugalmart. So they decided to hire Lee-Noonan Constructors,
experienced supermarket builders, to build it for them. Before going
into the contracting business together, Kenneth Lee had been an
estimator with Baker/Doyle, and Michael Noonan had been a lawyer in
a large law firm specializing in construction industry matters. The
partners of the two contracting firms were on a friendly competitive
basis.
They negotiated a contract. Baker/Doyle said they wanted a lump sum
proposal including a fair profit. Both firms were experienced in
supermarket building and nobody knew any more about the business
than they. The plans and specs were excellent, they had the permit
in hand, so they expected no building department corrections. They
knew the depth of fill, so the exact price could be determined They
agreed there were to be no extras. Both firms accepted this simple
concept.
Baker/Doyle would be ideal customers, since they would not be
unreasonable like most of the other customers of both firms.
Everything would go smoothly. There would be no justification for
any extras. They would prepare the contract on this basis.
Lee-Noonan's skilled estimating staff carefully estimated all the
quantities, called in their most trusted subcontractors, and
computed their best overall price. Meanwhile, Baker/Doyle had their
own estimating department figure the job. Upon detailed analysis of
the Lee-Noonan price proposal, they felt that it was reasonable and
they were happy to accept it. The price was right and they felt
comfortable with Lee-Noonan.
Michael Noonan prepared the contract. He used Standard Form of
Agreement Between Owner and Contractor (where the basis of payment
is a Stipulated Sum), Twelfth Edition, AlA Document A1O1, 1987,
General Conditions of the Contract for Construction, Fourteenth
Edition, AlA Document A20 1, 1987, and incorporated Flynn & Hill's
construction drawings and specifications. In A1Ol, among other
additional provisions, he added a clause that said, "It is
contemplated between the parties hereto that there will be no extra
costs arising from the work of this contract." This would guarantee
a profit for Lee-Noonan and a stable price for Baker/Doyle. It was
foolproof How could anything go wrong?
At 5:00 PM on Friday, April 23, 1993, the four contractors met in
Baker/Doyle's offices. They discussed the contract and their mutual
pleasure on entering a contract with knowledgeable parties on both
sides. All conditions were perfect. There should be no problem in
meeting the time schedule as there would be no owner's changes to
hold up the job and no extras.
Charlie Doyle laughingly reminded Ken and Mike that Baker/Doyle
would be watching them so there is no point in claiming changed
conditions or constructive acceleration or impact or any others of
the sometimes specious contractor excuses for extras. The four good
humored contractors signed the contract and opened a bottle of
specially chilled champagne. After lavish toasts, sincere
congratulations, and pleasant banter, they went out to dinner,
guests of Lee-Noonan Constructors. Ken and Mike were truly proud of
being trusted so implicitly by their respected senior competitors,
Baker/Doyle. Spirits were high and all were euphoric with optimism
and the warmth of mutual respect and trust.
A little over a week later, on Monday, May 3, 1993, Lee-Noonan
started mobilizing the job in the field One of their best
superintendents, Oran Peters, was available and was assigned to the
job. He immediately got the site fenced, a job office, telephone,
and chemical toilets installed, and temporary water and electrical
facilities in place. He had previously ordered a large sign
identifying the Frugalmart project with the names of Lee-Noonan,
Baker/Doyle, and Flynn & Hill prominently displayed, and it was now
sturdily installed.
Exercising caution, Lee-Noonan hired Quality Engineering, who had
done the land survey, to locate and mark the property lines, layout
the building on the site, and establish a working bench mark for
construction and grade levels. Ivan Jenson, low bidder on
excavating, had moved onto the site with earth moving equipment and
trucks. After completing the general site grading in less than a
week, they started excavating for wall and column footings on
Monday, May 10.
They dug down to the original undisturbed earth levels and continued
on down a minimum of 18 inches more into the virgin soil. The fill
depths proved to be exactly as predicted. After leveling off the
bottoms of all excavations and cleaning out the loose earth, they
started setting and tying the steel reinforcing in the footings.
Dowels were set for overlapping with the masonry wall reinforcing to
come above. Meanwhile, the steel column bolt templates arrived from
the steel fabricator. By Friday they were ready for building
department inspection of the footing excavation and reinforcing
called for on the following Monday. After Monday's approval, they
would start pouring the concrete footings on the following day,
right on schedule.
On Monday, May 24, at 9:00 AM the Building Department Inspector, Ray
Scott, showed up to look at the work in process. He had already
briefly reviewed the drawings in his City Hall office the previous
afternoon in preparation for this inspection. He introduced himself
to Oran Peters and asked to look at the Inspection Record. They
walked over to the footing excavation, paced solemnly around the
entire building perimeter, then went inside to look at the two large
isolated column pad excavations. The jobsite was neat, the work
looked good, and Oran Peters was proud of it He wondered what the
inspector could find to criticize without nit-picking. Scott picked
up an 8- foot length of #4 rebar and, using it, prodded the bottom
of the excavation in various places. He commented, "It seems a
little spongy. I'm not sure this soil would test up to 1500 psf. I
may be wrong. Maybe it's okay. But I can't approve it You'll have to
get the soil tested to prove it's good for 1500 psf loading." Oran
didn't know what to say and after some feeble defense of the soil,
he gave up. Scott filled in a red tag and told Peters not to do any
more work until the soil value was resolved between the structural
engineer and the building department He apologized to the deflated
superintendent and left.
As soon as the inspector drove off, Peters telephoned the Lee-Noonan
office and asked for Mike. Noonan's secretary came on the line to
say he was busy in a conference. Oran ordered her to interrupt him.
"This is a disaster!" Seconds later, Mike was on the line. Oran
spilled out the whole story, finishing with, "Now we're closed down.
What'll I do?" Mike told him to secure the site and come on in to
the office.
Mike immediately dialed Baker/Doyle and got Charlie Doyle on the
line. "The job's closed down by the Building Department Something's
wrong with the soil. We gotta get a soil report!"
Charlie snapped, "Who sez?"
"Our superintendent, Oran Peters, just called and said the Building
Inspector closed down the job and demanded a soil report. I thought
you guys had all the necessary engineering and approvals. What'll we
do now?"
"I'm sure everything's all right I'll look into it, Mike, and call
you right back!" They hung up, both concerned and puzzled.
Charlie quickly briefed his partner Abe on Mike's phone call and Abe
anxiously hovered while Charlie dialed Flynn & Hill's number. He
asked for Gerry Hill and recapped the Noonan phone call. Gerry said,
"Come over here this afternoon after lunch, say 2 o'clock I'll have
talked to Oran Peters and the Building Department before you get
here."
Abe and Charlie arrived at Flynn & Hill's office promptly at 2
o'clock. Hill said that he'd talked to the job superintendent and
one of the Building Department engineers about the soil problem. He
explained that the Building Inspector, Ray Scott, had been prodding
the natural bearing soil and that he felt that it might not test up
to 1500 pounds per square foot Hill explained, "This isn't a
scientific method of testing soil, but now that he's raised the
issue there's nothing left to do but order a soil investigation."
Charlie asked, "Can they do this to us? They approved the plans and
issued the building permit! I thought we were home free!"
Abe, concurring, chimed in, "Yeah! Home free!"
Gerry replied, "There's no point in moaning about it. The Building
inspector is just being cautious and is within his rights. Let's
call Tom Usher at GeoPhysical Technology and see how soon they can
take some in situ soil samples. After we know some facts we can
analyze the situation. Until then we're just irresponsibly
speculating." The contractor partners nodded their assent.
So Gerry Hill telephoned GeoPhysical Technology and Tom Usher said
he could take the samples in about 3 weeks. Hill earnestly explained
the crucial urgency and got Tom to agree to take samples tomorrow,
Tuesday, May 25, have tentative results late the next day, and a
final report for the Building Department on Wednesday, June 2. Tom
said this was ultrafast service for an old mend. GeoPhysical's fee
arrangements were acceptable to Abe and Charlie. Gerry thanked Tom
and told him go ahead.
Charlie said, "Maybe we should have gotten soil tests before the
design was started?"
Gerry Hill reminded him, "Perhaps you've forgotten that was what I
recommended at the time?"
"Yeah, I remember. You should have talked us into it!"
The preliminary soil report was hand delivered to Flynn & Hill's at
4:30 PM on Wednesday as Tom Usher had promised. It indicated that
the soil is good for only 1350 psf but would be increased to 2000 by
digging 2 feet deeper. Gerry Hill called another meeting with Baker
and Doyle for Thursday, 10:00 AM, May 27.
Gerry started by showing Abe and Charlie the preliminary report and
explaining the practical consequences. "It appears that the natural
soil near the surface isn't very good. Although it would support the
building if we merely widened the footings 10 or 15 percent, we'd
have to alter the reinforcing to take care of the extra footing
overhang. Alternatively we could deepen the excavations two feet to
get into the higher value soil. In either case the reinforcing will
have to be removed to redo the earthwork.
"In my opinion, it would be a better building to use the second
option and found the footings in better soil. This would also entail
adding 2 feet to the height of the exterior walls and a concrete
pedestal at each of the interior columns."
After considerable discussion the partners decided that they should
take Gerry's advice and build the better way. After all, they
reasoned, they would own the building for a long time.
They authorized Flynn & Hill to proceed with preparation of the
additional calculations and revised drawings. They'd submit the
revisions to the Building Department when the final soils report
arrived next Wednesday.
The final report was hand delivered to Flynn & Hill at 10:00 AM,
Wednesday. It substantiated the earlier preliminary results. At 2:00
PM, Hill brought the whole redesign package to the Building
Department and went over it with a senior engineering plan checker.
He said to leave it so he could study it more carefully and review
it with his superior. If it was okay, he would issue a revised
permit tomorrow morning. At 10 AM, June 3, Hill picked up the
approval and revised permit upon payment of the supplementary fee.
He then delivered it to Baker/Doyle's offices.
Charlie Doyle had the revised drawings and Building Department
approval delivered to Lee-Noonan's offices before noon. Lee-Noonan
reorganized the job and was back in full production the next
morning, Friday, June 4. They removed most of the reinforcing that
day. On Monday, June 7, they started deepening all the excavations,
and by Thursday, June 10, they were ready to reinstall the
reinforcing. However, this time they had made arrangements to have
one of Tom Usher's engineering geologists on hand to examine the
soil at the bottom of the excavations and approve it before
replacing the reinforcing steel. The soil was okay and they
commenced reinstalling the rebar.
By Monday, June 14, they were ready for inspector Scott to
re-examine their work before pouring the concrete. Early on Tuesday,
June 15, Scott approved the excavations and reinforcing so they were
able to pour concrete on Wednesday, June 16. Lee-Noonan had
previously alerted XYZ Ready mix that they wanted prompt service and
they got all the footings poured that day.
Fortunately, the job continued smoothly from there on. No more
glitches. They'd lost 22 days.
Life was back to normal at Baker/Doyle. All their jobs were running
smoothly and they'd heard no more bad news from Lee-Noonan's
Frugalmart job. Then, on Monday, June 28, a Lee-Noonan invoice
arrived in the mail. It was for the extra costs of removing and
replacing the reinforcing steel, deepening the excavations,
disposing of the excess earth, the additional masonry wall height,
the concrete column pedestals, standby costs of closing down the job
for 22 days, overhead and profit, a total of $39,855.
Charlie, his face white, took the bill into Abe's office, threw it
on the desk and flung himself into a chair. Abe read the bill and
sat there with his mouth agape. The two partners were incredulous
and outraged. The contract, clearly, was to have no extras. Everyone
had agreed to this concept. Lee-Noonan is trying to screw us.
They've got no ethics. Charlie then telephoned Mike and let him have
it. The old camaraderie seemed to have vanished. Mike said it would
be better to meet and talk it over, calmly and rationally. Why not
meet at Flynn & Hill's office? So Mike volunteered to set it up.
The next afternoon at 4 o'clock the four partners of the two
contracting firms were formally seated on opposite sides of the
large table in Flynn & Hill's conference room. Architect Flynn was
sitting at one end with Engineer Hill facing at the opposite end.
The contractors were poised, alert, grim faced, and quiet, so Gene
Flynn tentatively assumed control of the meeting.
Gerry Hill and Mike Noonan were at the ready with note pads and
pens.
Gene started out by saying that Flynn & Hill has not been retained
for contract administration nor dispute resolution services. He and
Gerry now are just trying to accommodate old mends.
At this point, Charlie interrupted to say, "This'll be very simple.
We have a contract here, signed by Lee-Noonan and Baker/Doyle, that
says no extras! Now we've received a billing from Lee-Noonan for an
extra 40 thousand dollars. Signed contracts don't seem to mean
anything to some people." Abe concurred, "Yeah, some people!"
Gene, feeling his way, suggested that both sides should state their
viewpoint. "Mike, please explain Lee-Noonan's position on this."
Mike Noonan cleared his throat and began, "We admit that the
contract contemplated no extras. But what occurred was clearly not
anticipated by either party. The soil turned out to have less
bearing capacity than Baker/Doyle thought it had.
It's their soil, not ours. The costs we billed were honestly
incurred. We should be reimbursed in full for all our costs and
expenses plus a reasonable profit."
Gene nodded to Charlie, who calmly replied, "We don't question the
honesty of the billing. That's not the issue. We had a no extra
agreement. No extras means no extras. We talked it over and agreed
to it. That's all there is to it."
Abe sagely nodded agreement and added, "We owe nothing."
Gene Flynn, always optimistic, suggested that maybe this could be
settled by compromising the bill on a 50/50 basis. All four
contractors reacted vehemently, objecting. .
Mike Noonan replied, "No. We spent the money. It's a fair bill and
we'll collect it in full."
Charlie said, "No extras. We owe nothing!"
Gerry Hill suggested that they take a short recess for a cup of
coffee. He arranged for coffee to be served and he and Gene went
into an adjoining office, closing the door. They discussed the
possibility of recommending mediation but didn't think it would be
likely to succeed, since both parties wanted all or nothing. They
felt that the spirit of compromise required in a mediation was
completely lacking in this case. They decided to recommend
arbitration as a more practical procedure under the circumstances.
The six reassembled in the conference room and closed the door.
Resuming the chair, Gene invited suggestions. Abe immediately
suggested where Lee-Noonan could put their bill. No one rose to the
bait.
Mike Noonan reminded them that the Frugalmart contract included an
arbitration provision in Article 4.5 of the AIA general conditions,
AIA Document A201. He also pointed out that all references to the
architect in the dispute resolution process in Articles 4.3 and 4.4
had been stricken as Flynn & Hill had not been retained for those
services. Therefore, the architect's decision was not required as a
precedent to arbitration.
Gene urged that the dispute be submitted to arbitration and let an
experienced construction arbitrator decide the matter. After
considerable discussion, the two firms of contractors agreed that
this would be the only satisfactory course. They would wait until
the end of the construction and submit this single issue for a final
and binding decision.
Kenneth Lee said, "In the meanwhile, we might as well shake hands,
be mends, and build the building."
Abe laconically replied, "Right."
>>
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