To wrap up our Real Estate Review Miniseries our final entry looks at how owners and builders can minimize risk for both private and public projects. Additional details are included in our Chambers Regional Real Estate Guide.
The Construction Contract is Critical
A construction contract is the primary source for managing risk for a project of any size. The contract should include detailed provisions that touch on every element of a project including warranties, limitations of liability, insurance, payment terms, change order requirements, dispute resolution, and lien releases, as well as schedule delays. The American Institute of Architects provides form contracts frequently used for commercial projects across the country. However, it’s very common for an experienced owner or contractor to modify the forms to tip the contract conditions in their favor.
Construction contracts assign responsibility for all design and build elements, and clarify where roles start and stop. In the most traditional model, an owner executes separate contracts for design of the project with an architect and construction of the project with a general contractor, keeping the design and construction roles legally separate.
For projects in which the owner is more vested in the ultimate function of the completed project, rather than its appearance, or is looking to minimize the number of vendors to manage, a design-build contract places the design and the construction of the project in the hands of the general contractor. The design-build trend is on the rise across the country and, in Oregon, design-build is permitted by all agencies for all types of design and construction.
Management of Schedule – Related Risk
There is an old saying in the construction industry. It goes as follows: "On any project, there are three things that the owner cares about: cost, quality, and time; the owner gets to pick two out of the three."
Unfortunately, there is a lot of truth in this saying. If the owner is willing to spend more money or give the general contractor more time, the quality desired by the owner is easier to achieve. If the owner wants to accelerate the completion date, it will likely cost more or the quality may suffer. These objectives are addressed in various provisions in a well-drafted construction contract, primarily by provisions that deal with change orders.
Maintaining the schedule is often the most challenging of the three objectives.
Missed deadlines are caused by a maddeningly large number of issues, from natural forces and poor planning to market forces and supply chain interruptions. All construction projects are scoped with an agreed upon end date. But for projects that have a more critical completion date, the Tokyo Olympic Stadium for example, there are ways to mitigate schedule-related risk. The primary tool for an owner is to include a liquidated damages provision in the contract. This provision specifies a dollar amount that the contractor will pay the owner for every day that the project extends past the contracted completion date. The amount may also increase the longer a project is delayed. On the flip side, contractors often counter with provisions that require the owner to pay for owner-caused delays, and for payment of an early completion bonus if the contractor completes the project prior to the contracted completion date.
Other Risk Mitigation for Owners and Builders
Retainage and bonds are two additional mechanisms available to owners to reduce risk related to contractor’s performance.
Retainage is a contract provision that specifies a percentage of the contract price that can be withheld from progress payments until the work is substantially complete. Under Oregon law, an owner is not allowed to retain more than 5% from progress payments for work completed on both public and private projects.
Performance and payment bonds are required on public projects in Oregon. Since bonds serve as protection for the owner, the premiums are generally charged to the cost of the work and paid by the owner. Typically, performance and payment bonds are not required on private projects that have an experienced and well-capitalized general contractor. When that’s not the case, the owner will often take on the premium cost and require both a performance bond and payment bond.
Builders are not without legal protections in Oregon. In the event of non-payment by an owner, access to liens and bonds is available in different form for public and private projects.
The good news for private projects is that since Oregon is a direct lien state, any claimant who is a contractor, subcontractor, designer, or supplier has the direct right to file a lien claim even if the general contractor or a higher-tier subcontractor has been paid. To file, they must comply with the statutory notice and filing provisions which we detail in our Real Estate Guide.
Contractors, designers, and material suppliers do not have the right to lien public property in Oregon, but they do have the right to make a claim against the statutorily required payment bond.
Construction in Oregon is enjoying healthy growth and will do so for the foreseeable future. Significant commercial and housing projects are making headlines every week. Owners and builders are embracing exciting new collaborative models and sustainable building practices. Opportunity Zones are energizing development, construction jobs numbers are breaking records, and industry leaders are eager to come to Oregon to stake out their brick and mortar presence.
This article is the seventh and final entry in our Oregon Real Estate Review Miniseries.