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Tips for proactive risk management of construction defect claims

Construction defect lawsuits have increased in recent years due to changes in the law and advances in computer modeling which do not always translate seamlessly from design to construction. However, you can manage the risk of construction defect litigation through careful sequencing and coordination of work, and use of solid documentation procedures.

Construction contract negotiation and terms

Risk management begins with contract terms during negotiation by clearly defining the legal and financial responsibilities of the parties. Understand the contract to ensure you carry out obligations as agreed.

Propose a waiver of consequential damages. Consequential damages are indirect costs incurred when a party fails to meet obligations as agreed under the contract. In a breach of contract claim, contractors can incur substantial liability if delays cause a loss of operating revenue, profit, or production.

If a blanket waiver of consequential damages threatens to kill the deal, negotiate to fix a maximum damages amount. Clearly define the scope of work and check the financials of any subcontractors you hire. If the subcontractor is insolvent you may be on the hook if a problem arises with any defects or poor workmanship found later. Check your insurance coverage and obtain additional riders if necessary. Push for language that resolves claims in nonbinding mediation or binding arbitration. Clarify warranty periods and responsibilities.

Collaboration between architect and contractor

An architect-contractor collaboration will streamline and coordinate work and efficiently address mistakes or adjustments during the build phase. Schedule a regular walk through to discuss and identify unanticipated issues. The architect's holistic understanding of the project design enables recognition of problems quickly, often without having to review design documents.

If timelines allow, schedule regular meetings with the architect, owners, or other contractors to review and gather input on layout, material selection, system performance, and maintenance to manage goals and expectations. Coordinate and sequence work plans for quality and completeness by identifying and scheduling production milestones, supervision via quality assurance, and inspections for quality control to identify mistakes in system installation, poor quality material, or failure to use materials as specified. Exercise caution in value engineering that may potentially thwart the design.

The architect's involvement during building is particularly important if you are renovating. Have them come in and look at walls and other structures as they first open up, as delays or defects can be avoided or better managed as you collaborate to recognize unexpected issues early. If the architect is unable to walk through, take photographs for their review. 

Documentation, the key to defending a claim

Documentation should be prioritized during the project. If defects arise, particularly structural or other unseen latent defects, detailed documentation will save you money. Evaluation to determine cause and assign blame is expensive, and costs more than the litigation itself.

Suggested documentation: 

  • Photograph structures and surfaces not easily accessed once construction is complete.
  • Verify changes to scope of work or alterations to the design plan presented by unforeseen circumstances in writing, as a note in a log book with a date is better than no record at all.
  • Design and materials specifications and how they are used for quality assurance controls.
  • Documentation of proper installation pursuant to manufacturer guidelines and system compatibility as part of quality control processes.
  • Organization of logs, contracts, forms, purchase orders, materials testing, delivery schedules, spec changes, code or standard failures, deficiencies in material quality or substandard installation.

By implementing these recommendations, you will be better positioned to manage risk, saving time and money in construction defect litigation.

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