Recent Developments in Construction Transactions
Recent construction industry developments challenge traditional approaches to the allocation of responsibilities, risks and rewards. Many project owners are resisting changes being promoted by industry professionals. Here are two of the more significant developments:
Subcontractor Default Insurance. Managing the risk of subcontractor default is an age-old challenge for contractors. Historically, contractors transferred some of this risk by requiring key subcontractors to purchase performance and payment bonds. Today, subcontractor default insurance, a product covering contractors against costs of subcontractor failures, offers an alternative to subcontractor bonds.
As compared to surety bonds, default insurance provides contractors greater control over responses to subcontractor default. Instead of waiting for their sureties to investigate and dictate plans for resolving bond claims, contractors covered by these plans generally may carry out corrective action after documenting the subcontractor default to the insurer. Such flexibility is chief among reasons why contractors increasingly are choosing default insurance instead of subcontractor bonds.
In recent years, contractors have begun asking project owners to accept default insurance in lieu of contractor performance and payment bonds. In addition to touting the above-described merits of default insurance, contractors commonly maintain that the cost to the project owner of that coverage is slightly less than or equal to contractor bonds premiums.
Project owners have generally viewed default insurance as a less-than-equal alternative to contractor performance and payment bonds. Primary advantages to the owner of contractor bonds include coverage of defaults by the contractor itself, and the owner’s position as the “beneficiary” of the contractor bonds (whereas the owner is not a primary insured under, and stands to benefit only indirectly from, the contractor’s default insurance).
Other advantages to the owner of contractor bonds include: 1) “first-dollar” coverage for defaults, without deductibles and co-payments normally associated with default insurance; 2) coverage for non-payment claims by subcontractors, sub-subcontractors and suppliers; 3) and personal and corporate guarantees that secure the contractor’s indemnity obligations to its surety, which provides greater incentives for contractor executives to address problems on bonded projects.
Integrated Project Delivery. This is a relatively new project-delivery method that significantly recasts the relationships of industry players. It has largely been defined by the American Institute of Architects, which has created a number of IPD contract forms. A common IPD approach is to replace the traditional design contract and general contract with a single IPD contract between the project owner, the architect and the contractor, such as the AIA’s Document C191–2009 (the “AIA C191”).
A distinguishing characteristic of Integrated Project Delivery is the extent to which its success relies on trust and collaboration between project partic-ipants. IPD contracts are intended to create a “no-blame” environment, often incorporating a “no lawsuit” provision that waives the parties’ rights to litigate or arbitrate a wide variety of disagreements. Parties to an IPD transaction are expected to work as a team to advance the best interests of the project instead of their own agendas. Key project decisions are, whenever possible, to be made by unanimous consent of the project team.
IPD contracts often include novel approaches to architect and contractor compensation which, according to IPD proponents, tie the parties’ financial rewards to project success. The AIA C191, for example, generally requires the owner to continue paying costs of the work incurred by the architect and contractor after the “Target Price” has been exceeded, but provides options for reducing the owner’s obligation to continue paying for architect and contractor personnel in such circumstances. The AIA C191 further provides for payment of bonuses if actual project costs are less than the target cost established by the parties, and additional incentive payments for satisfaction of quality, safety and other goals.
While supporters find that IPD promotes open communications, creativity and favorable allocation of risks and rewards, many project owners have refused to adopt IPD, citing clearer division of responsibilities, greater accountability and more certain pricing as reasons for favoring traditional project delivery methods.
Steven Becker is a partner in the Bryan Cave law firm's Kansas City office.
P | 816.374.3379
E | sbbecker@bryancave.com
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