Construction Contract Foundations

Cracks in a school construction contract’s foundation can lead to costly disputes, project delays, and unexpected financial burdens. This article highlights key construction contract pitfalls and offers recommendations for securing legally compliant, favorable contract terms.

Indemnification

For Michigan public schools, indemnification is typically a one-way street. Indemnification means reimbursing another party for losses, damages, or liabilities claimed by a third party. Although construction managers, architects, and contractors often seek to include mutual indemnification provisions in their contracts, Michigan case law makes clear that public schools lack explicit legal authority to indemnify third-party contractors in most circumstances. 

On the flip side, a school should be indemnified for damages that arise from a contractor’s or construction professional’s negligence or contract breach. Because of litigation costs, we strongly recommend including indemnification provisions that allow the school to recover attorney fees in the event of a dispute. In the absence of such a provision, attorney fees are likely unrecoverable, which may dissuade a school from pursuing a valid claim.

Construction Supervision

Construction supervision is a critical, yet often overlooked, aspect of construction contracts. It is required by two Michigan laws: the Occupational Code and the School Building Construction Act (SBCA). The Occupational Code requires that materials and completed phases of construction be reviewed “under the direct supervision of a licensed architect or licensed professional engineer.”

The SBCA, previously required an architect, engineer, or other “qualified person” (i.e., construction manager) to supervise school construction projects. Whether this requirement still applies, is less clear due to recent legislative amendments. As reported in our July 2024 edition of School Law Notes, Governor Whitmer signed into law Public Act 67 of 2024 (PA 67), which amended the SBCA. PA 67 removed the SBCA’s express requirement that an entity supervise a construction project, but the SBCA still refers to the responsibilities of the “person supervising construction.” This suggests that the SBCA continues to require construction supervision.

The Michigan Attorney General previously issued opinions that an entity cannot both construct and supervise a project because it creates an inevitable conflict of interest (i.e., the entity is evaluating its own performance). In light of this concern, we continue to suggest that schools contract with independent project supervisors, such as construction managers or owner’s representatives, to ensure the school’s interests are adequately represented and protected.

Delay Damages

Standard-form construction contracts often include contractor-friendly delay damages, which allow a contractor to recover monetary damages from a project owner for delays. This poses a significant risk for public schools, as delays caused by the actions or inactions of a school’s consultant or even another contractor could be attributed to the school.

For example, if one contractor delays the project, it could result in extra equipment rental costs and overtime expenses for other contractors. Without a “no-damages-for-delay” provision, a contractor may be able to recover those costs from the school. There may not be enough money in the project fund to cover those costs, particularly in a project’s later stages, leaving a delayed contractor with a possible claim to other school funds.

Additional Services

Standard-form consultant contracts may include an “additional services” provision, which refers to any work that a consultant performs outside the base contract scope that entitles them to additional compensation beyond the base fee. Consultant contracts should be closely reviewed to determine when a consultant can charge extra fees.

Though some situations may warrant additional compensation via change order, school officials should understand when that would occur, a reasonable estimated cost, and require written authorization before any additional services are performed and charged. A good rule of thumb is that a consultant’s base fee should cover all services necessary to complete the originally planned project (i.e., a project with no additional owner-directed work scope).

Drawings and Diagrams

It is crucial for an architect contract to expressly authorize a school’s permission or license to use the drawings and specifications even after the architect stops providing services, either by project completion or termination, without paying an additional fee. Future consultants will need those documents to complete, modify, or add to the project. Because a school pays the architect to prepare the drawings and specifications for the project, the architect agreement should grant the school an irrevocable right to use them.

Procurement and Legal Counsel

Although not required by Michigan law, issuing a request for proposal to select construction consultants may allow a school to state its terms upfront, and have bids submitted under the condition of those terms. Additionally, school officials should review board policy, as it may in some cases require that consultant services be formally bid out. To protect the school’s interests, school officials should contact legal counsel early in the project’s planning stages to assist with both the selection process and contract preparation.