A smooth structural fabrication project requires a good contract

Want a smooth project in structural fabrication? A good contract makes all the difference. Attorneys with the right legal experience can uncover hidden risks and, ultimately, find those devils in the details. Getty Images

Structural steel fabricators occupy a unique place on construction projects. Their steelwork has substantial cost and is fundamental to the construction, and they often share design responsibilities with several other parties.

As construction attorneys, we generally become involved in projects long after the parties have signed the contracts and encountered problems on the job. We have seen issues ranging from changes resulting from design errors or omissions, missed scope, and poor coordination of the design and work to poorly drafted contracts that lead to conflicts around who’s responsible for what.

Because of the crucial role of steel, a small change, error, or omission in any project contract can lead to more time, cost, and stress. Though steel is perhaps one of the most well-understood construction materials in science, the industry is still trailing when it comes to contracting in ways that properly limit a fabricator’s responsibilities for steel construction.

Design Intent and Constructibility

For a structural fabricator, it all starts with two simple questions: Can this be built? and Do I have the ability to build it? A smooth project requires a constructible design. That seems obvious. Yes, you’ll always have minor issues with the plans. Regardless, there lies a certain point at which the project becomes unworkable, and in terms of time and money, the project ends very differently from what was projected with the original bid.

A fabricator who misreads the design and miscalculates the bid will likely be held to the terms of the contract and bear the consequences in time, cost, and reputation. If the fabricator wins a job that has an unworkable design, through no fault of its own, the company still risks increased costs and lost time. The involved parties might have to resort to drawn-out litigation to recover what is due. Even after all this, a fabricator still can get burned.

An unclear design in regard to intent and constructibility poses a risk for everyone involved. When evaluating designs, a fabricator should draw on its expertise and industry experience, or look to those more experienced for guidance.

Essential Terms

Assuming a fabricator understands the project’s design and how to price the work, it next should ensure all parties have a mutual understanding of the essential terms of the agreement, and that the contract expresses those terms clearly. Ambiguities and “silence” (omissions) in a contract typically pose one of the biggest threats to a smooth project.

The essential terms should answer six questions:

1. What items are included in the fabricator’s scope of work?

2. What is excluded from that scope?

3. What are the timing requirements to perform the scope of work?

4. How will the other party pay for that work?

5. What will the timing for those payments be, and are there any limitations on payment?

6. Are there other unique performance responsibilities, including delegated design work, such as for connections?

Of all these, the scope of work, what it entails and what it excludes, is perhaps the most important. We frequently see million-dollar disputes in which parties argued about whether particular work constituted an original contract’s scope or extra work. Fabricators can avoid this by being as descriptive and comprehensive as possible, especially when agreeing to the language about the scope of work in the contract.

Fabricators should study the plans and look for anything that may be unclear or ambiguous. They then should obtain clarification in writing and address it specifically in the scope of work or an exclusion. Unaddressed ambiguities otherwise constitute potential landmines at later stages of a project.

Essential Documents

Integration and incorporation are two very important concepts in contract law. A fully integrated contract contains all essential terms of the parties’ agreement. It typically excludes any outside conversations, oral representations, or anything else not explicitly written into the contract itself. Most contracts usually contain a “merger” or “integration” clause that explains that the contract is fully integrated, such as the following:

This Agreement constitutes the entire agreement between the parties with regard to the subject matter hereof, and supersedes all prior and contemporaneous communications, agreements, and assurances, whether verbal or written.

Working under a fully integrated agreement, parties typically cannot rely upon outside information to modify explicit terms of the contract. For example, a fabricator that lists exclusions in an email during the contract negotiation would have difficulty relying on those exclusions if they are not written into a final, fully integrated contract.

Incorporation is a way to add terms to those written verbatim in a contract. By defining the term “contract documents” and listing the various components of the design as “contract documents,” an owner or general contractor incorporates the design into the agreement, making the design a part of the agreement itself.

If the parties were to write in the scope of work that “the parties agree that the work will be performed in accordance with the AISC Code of Standard Practice, which is incorporated herein in its entirety,” the code then becomes part of the agreement.

A fabricator should ensure every crucial document and term is properly incorporated and made part of the final agreement. This includes the thorough descriptions of scope, all exclusions, and any other important term that will govern how the fabricator will perform the work.

A recent case in the U.S. Court of Appeals for the 8th Circuit (which governs the federal district courts in Arkansas, Iowa, Minnesota, Missouri, North Dakota, and South Dakota) illustrates the importance of incorporation. In that case, a subcontractor explained its work in a proposal and stated that the work would be governed by the AISC Code of Standard Practice. Unfortunately, the proposal was never explicitly incorporated into the subcontract.

When a dispute arose regarding the timing of submittals and responsibility for proceeding with work, the subcontractor claimed that the code controlled and dictated responsibility, as well as who bore the related costs. The general contractor claimed that because the proposal was not incorporated into the contract, the code was not made a term of the contract, and therefore it did not apply. The court ultimately ruled in favor of the subcontractor based on another legal theory, but nevertheless, the entire issue and years of litigation could have been avoided if the subcontractor had made its proposal a part of the contract.

Design Responsibility

Many projects today delegate connection design to fabricators, based on the rationale that fabricators are in the best position to determine connection methods. In other instances, fabricators are also asked to bear responsibility for even larger aspects of the structural design, or they are given more amorphous design responsibilities such as providing “design-assist” services to the engineer of record during the design phase.

Who bears what design responsibility and to what extent? The contract needs to state clearly whether the fabricator is responsible for creating aspects of the design, and if so, exactly what aspects those are, and whether the fabricator needs to obtain the services of a licensed professional. If a fabricator is merely contractually required to “assist” with the design and provide general input, the fabricator needs to ensure that the language in the contract leaves the owner, the construction manager, or the designer with final responsibility for the design. Ambiguity here could leave a fabricator with unlimited responsibility for increased costs from design changes or other issues.

Finally, if a fabricator does bear some explicit obligation for the design, the contract documents should clarify the timing of the fabricator’s design responsibilities. The AISC Code of Standard Practice, for example, provides options for the sequence and steps of the connection design process, depending on how the parties choose to delegate responsibility.

An explicit reference in the contract to this section of the code will work to incorporate this process into the agreement and govern how the parties proceed. Alternatively, the designer can create a schedule governing work with the fabricator and other parties during the design process, and the fabricator can have that incorporated into its contract as a term.

How Are Changes and Claims Handled?

Successfully navigating disputes can prevent other breakdowns later in a project. Doing so is also crucial to getting paid. During contract negotiations, owners, construction managers, and general contractors generally are not willing to make changes to the claims-and-change procedures in the contract. For this reason, fabricators must take the time to review and fully understand those procedures to ensure they can respond quickly when changes or disputes arise on the job.

Many changes-and-claims clauses require contractors to submit notice and substantiate any requests for additional project time and compensation within a short time frame. Claims procedures often include varying levels of review and submission, and they often explicitly state that contractors waive any claims if they fail to follow the procedure strictly.

Depending on the law controlling the contract, these waivers can have serious effects. Courts vary state by state in how they interpret these contract provisions, but certain states enforce them as written and refuse contractors payment if they have failed to comply strictly. Considering this, fabricators should be familiar with these provisions and follow them as carefully as possible.

Does the Contract Have Exculpatory Clauses?

An exculpatory clause is a contract term that relieves one party of liability in certain situations and supposedly shifts risk (though some would argue that in some circumstances they do so unfairly). These include “no damages for delay” and “pay-if-paid” clauses. We frequently see new and creative uses of exculpatory clauses that generally work to the detriment of the party with less bargaining power (i.e., the lower-tiered contractor).

Not all exculpatory clauses are enforceable as written because the courts in many states disfavor them. No-damages-for-delay clauses, for example, have well-known exceptions throughout the country, with certain courts refusing to enforce them in instances of bad faith; active interference by the other party; or failure to perform essential contractual obligations by the other party, such as making the project site available.

Unfortunately, exculpatory clauses are a cat-and-mouse game. If a lawsuit arises and a court makes an exception to a particular exculpatory clause, the clauses are often rewritten in new contracts to avoid that exception. The cycle then starts over, and for the law to catch up, it takes new lawsuits and contractors willing to venture into uncharted legal territory.

Lower-tiered contractors should seek to eliminate as many exculpatory clauses as possible from a contract. They won’t be successful in most cases, but it’s still worth trying. If an exculpatory clause must remain, the clause should be considered and evaluated as a payment risk. Contractors should also look at the reputation of the higher-tiered contractor and owner to see whether they have a history of lawsuits or disputes on their projects, and whether they frequently rely on those exculpatory clauses to avoid payment or liability.

Finally, contractors should review troubling clauses with someone familiar with the state of the law. If a particular exculpatory clause is one that has been considered by relevant courts, the clause might not be enforceable as written and might not actually present a risk for the project.

Are All Contracts Aligned?

On any project, fabricators need to consider more than their contract with the party upstream, such as the general contractor, construction manager, or owner. They should also be sure to align the provisions in their downstream contracts, such as those with subcontractors or consultants. The effect of not doing so can be significant.

If litigation were to arise between a general contractor and fabricator pertaining to the work of the fabricator’s erector, the fabricator would face a significant burden if it could not bring the erector into that lawsuit. If the downstream contract was not aligned with the upstream contract, however, the fabricator may find itself in litigation in two different courts or venues.

Similarly, if a pay-if-paid clause in a fabricator’s contract does not flow down into its subcontract with an erector, a fabricator may find itself on the hook for payment despite not having received payment itself. Fabricators must ensure that the terms of upstream contracts flow through to downstream contracts by incorporation, and that essential provisions in both contracts are aligned.

Attorney Review

These are just a few of the crucial points that structural steel fabricators should think about when negotiating and reviewing a contract for a new project. Contracts vary, of course, and we always recommend having an attorney review unfamiliar contracts when working on a new type of project or with a new company.

The key is to look for contractual pitfalls with significant cost implications. Those with the right legal experience can uncover hidden risks and, ultimately, find those devils in the details.

Ed Seglias is a partner in Cohen Seglias’ Construction Group and serves as general counsel to American Institute of Steel Construction (AISC); Jason Copley is chair of Cohen Seglias’ Construction Group and serves as assistant general counsel to the AISC; and Matt Skaroff is an associate attorney in Cohen Seglias’ Construction Group.

This article is for informational purposes only. It is not intended to be and should not be relied upon or construed as a legal opinion or legal advice.