Increased Contractor Costs on Public Works Projects - Strategies For Reducing Owner Risk

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General contractors on public works projects often submit claims for extra compensation to public entity project owners for increased costs during construction, and point to information they did not know when preparing their bids. In light of the recent California Supreme Court decision in Los Angeles Unified School District v. Great American Insurance Co. (2010) 49 Cal.4th 739, such claims are likely to increase in the future.

In Los Angeles Unified School District, the Supreme Court held that a contractor does not need to show fraudulent intent in order to recover for extra work or expenses necessitated by unknown conditions. Rather, the contractor can recover for such extra expenses where "(1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information."

However, there are various strategies that public entities can employ during project bid phase to reduce the risk that they will be liable for such claims:

(1) Where conditions permit, the public entity should require a mandatory pre-bid site visit to the project location and walk through for all contractors that bid on the project.

(2) Public entities should double check the bid documents to ensure that all information material for bidders to calculate the cost of their performance has been provided. Such information may include reports from consultants that the public entity has hired to provide geotechnical, environmental, and other pre-construction site analysis. Where the public entity does not have any such information, the bid documents should specify that bidders are required to perform a site analysis in coordination with the public entity to determine any information material to their bids.

(3) For public projects that require the use of a design professional and/or project manager, the design professionals and/or project managers should be contractually required to provide any and all information that may be material to bidders in formulating their bids. Additionally, the public entity should require that it be named as an additional insured in case the it receives a contractor claim for increased cost of performance due to the failure to disclose material information. Finally, the design professional and/or project manager should be required to indemnify and defend the public entity with respect to any and all contractor claims for additional compensation that are the result of the failure to disclose information known by the design professional and/o project manager.

By employing these strategies, public entities can reduce the risk that they will be liable for contractor claims for increased cost of performance.

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