Keeping Proposal Promises from Becoming Contractual Obligations

Contractor’s proposals are often the first step in a courtship between owners and contractors. Initially, everyone is optimistic for a successful outcome. The honeymoon period may last the entire project and culminate in a project that is delivered on-time and on-schedule. However, in today’s overheated construction environment, costs may rise, labor may become scarce, engineering may be late or defective, and equipment and material may arrive at site late or defective, all of which may strain relationships between owners and contractors and often can lead to litigation.

A recent trend in construction litigation involves a rather novel approach of owners claiming a breach of contract against contractors for failing to fulfill the “promises” contained in their technical and commercial proposals that are often referenced in or attached to the contract as an exhibit. Contractor’s proposals often contain optimistic statements, sometimes with a salesmanship twist, that attempt to present the contractor in the best possible light when vying for a project. So what happens when the project deteriorates and a dispute arises, do so-called “proposal promises” become contractual obligations of the contractor? Let’s take a closer look.

Contractors’ proposals typically include an execution plan and similar write-ups describing how the contractor plans on executing the project to achieve the owner’s desired result of an on-schedule and under-budget project. These write-ups often contain general, sales-focused statements, similar to the following:

• “Our scheduling programs will eliminate schedule coordination problems.”
• “We will dedicate the best team to the project containing all the right skills.”
• “We will optimize cost and schedule.”
• “Our execution approach will minimize overall program costs.”
• “We are familiar with labor in the area and will properly manage and source skilled labor.”
• “We will utilize our tried- and-true cost tracking and forecasting programs to ensure project success.”

Potential problems arise when the contractor’s proposal is considered part of the contract, either by reference or as an attachment/exhibit. Typical proposal statements, such as those listed above, contain ambiguous terms such as “optimize,” “minimize,” “ensure,” and “properly.” Such statements, in the hands of skilled trial attorneys, can take on different meanings in the eyes of a jury. Ambiguous terms have no place in a construction contract.

Construction is a risky business and even the best laid plans can be disrupted by unforeseen events. For example, many parts of the country are experiencing an overheated construction economy resulting in rising costs, a shortage of skilled labor, and tighter project schedules, all of which could increase the overall cost of construction. If project costs rise higher than reasonably anticipated, does this mean the contractor was negligent, somehow failed to perform, failed to fulfill its “proposal promises” to minimize cost or schedule, or failed to “ensure success?”

As stated above, ambiguous terms have no place in a construction contract. The following suggestions may help to ensure that owners and contractors are in better alignment regarding contractual rights and obligations. This in turn, may help to avoid misunderstandings and potential disputes.

1. Do not attach or incorporate the contractor’s proposals into the construction contract – Often, the proposal is rendered obsolete by post proposal clarifications and bid addenda and, as such, the proposal may not be consistent with the final agreement of the parties. Should the parties wish to preserve parts of the proposal, such as bid clarifications or exclusions, these should be separately listed in the contract as opposed to attaching the entire proposal to the contract. This may also avoid vague or sales-type wording from being incorporated into the contract.
2. Clarify vague language prior to incorporating it into the contract – The main body of the contract contains many legal terms that may be hotly negotiated, including warranties, insurance requirements, or commercial terms. Technical exhibits typically do not get the same level of scrutiny; therefore, it is more likely that vague or unclear terminology may be incorporated into the contract. It is prudent to review all contract attachments/exhibits to ensure all terms are properly defined and that any potential “proposal promises” are defined.
3. State the basis for proposal execution plans – The execution plans in a typical contractor’s proposal should, at best, be considered preliminary as they are often based on preliminary engineering and incomplete information. Execution plans are “ever green” documents in that they evolve over time as more information is made available. It is important to state the basis for critical sections of the proposal, so that when things change or evolve, the parties have an established starting point. For example, a contractor’s execution plan may state that it intends to utilize certain cost or schedule control programs, but during the project, a lack of data from the owner’s other contractors may render the programs useless without the needed data to populate the model. In addition, it is prudent for each party to list the data it needs to perform its work, along with the date needed, to ensure both parties understand the expectations.
4. Document changes from the original plan – Good project management requires thorough documentation of changes, not just regarding the scope of work, but also regarding the manner of performance. A contractor may have planned to execute the project in a certain manner but, due to unforeseeable events, may be required to modify the plan accordingly. Should the project be completed on-time and under-budget, few questions are likely to be raised. However, in today’s litigious environment, the Monday morning quarterbacks (and litigators) will be out in full force criticizing the contractor if the project turns sour due to, as some may argue, the contractor breaking its “proposal promises” and not following its original plans. The owner may claim these “promises” were part of the reason why it selected that contractor in the first place. Contractors are advised to document critical changes in their execution plans to help the parties understand that even the most carefully planned and executed project may require adjustments to their execution plan due to unforeseeable events.

Construction is risky, and it is not a perfect science. More often than not, project circumstances change, resulting in changes to the project execution. An over budget or late project leads to disappointment and increases the chances that the Monday morning quarterbacks will be second guessing project decisions. Therefore, by being aware of potential “proposal promises,” contractors can hopefully ensure that only critical information is included in the contract, while at the same time preventing sales-type information from becoming an ambiguous contract obligation. 

Source: Christopher J. Sullivan

Released: October 07th, 2008 01:00 PM

Phone: (713) 626-2525

Fax: (713) 626-2555

Email: cjsullivan@interface-consulting.com

Category: construction litigation assistance