The Critical Path

Several years ago, I represented a masonry subcontractor in a very large and complicated construction defect action that went on for years (as these cases often do). A Condominium Association that owned a large and relatively luxurious (by my standards) residential complex alleged several deficiencies in the design and construction of the building. Some of these claims had merit, some did not. During the original construction, my client had installed nearly all the building envelope, except for the roof. To be sure, it was a high-exposure case that kept me quite busy.

The case started with about fifty or sixty defendants, and after twelve days of mediation spread out over a two-year period, discovery proceeded in earnest. Around 150 witnesses were deposed over the years, and every now and then an attorney would go missing, leading the rest of us to speculate as to whether they were on the verge of settling out. During the time, this case was being litigated, two separate attorneys went out on maternity leave, came back, and went on maternity leave again. There were several changes of jobs, one retirement, and one post-mediation session Christmas party where the mediator himself brought the rum with which to spike the eggnog.

Eventually, after who knows how much was collectively spent on defense costs (and the Association’s Board had gone through another change in power and brought on new counsel), fact discovery ended and expert discovery began. By this time, there were only a handful of parties left in the case. The Condominium Association’s claims against my client were by far the largest remaining claims. Settlement seemed impossible, as the Association’s counsel refused to back down from his $11,000,000 demand, insisting that his client needed to completely reconstruct the entire façade (as well as the associated flashing and waterproofing within the cavity wall). As it appeared certain that the case was headed for trial, all parties lined up their experts.

The Condominium Association served the expert report of a construction cost estimator. The report was beautiful—thousands of glossy photos backed up the Association’s counsel’s claim that the reconstruction of the façade would cost just north of $11 million. The witness had an impressive curriculum vitae: he had a Masters’ degree from an Ivy League school, owned a mid-sized construction consulting firm, and had been involved in some of the area’s most well-known projects over the years. This was not an expert the Association’s counsel picked out of some Plaintiff’s database – this was a bona fide expert.

At his deposition, the expert made an impressive appearance; immaculately dressed, and with a powerful, authoritative (yet calming) voice. My fellow defense counsel and I looked at each other, mentally rehearsing what we would have to say to our clients after the deposition as we requested our settlement authority be tripled. Then, the expert began to discuss the methodology underlying his opinions, with testimony that went much like this (this is, of course, being slightly paraphrased, for entertainment value):

Q: Now in your report you offer the opinion that it will cost over $11,000,000 to reconstruct the entire façade, correct?
A: Yes, that’s correct.
Q: And you are of the opinion that the entire façade needs to be reconstructed?
A: Yes, I am.
Q: When did you form the opinion that the entire façade needed to be reconstructed?
A: About ten minutes after first going to the building, after the Building Superintendent told me that’s what they were planning on doing…

All of us defense counsel looked around the table at each other. We knew this testimony was great, but the fact remained that this witness was not being offered for his opinions on liability, just on damages. The fact also remained that the Association had other experts, all of whom testified (in sum and substance) that to a reasonable degree of engineering certainty, the repairs the Association intended to perform did, in fact, need to be performed. This testimony, however, would prove to be a preview of what was to come. We began to drill down into the details of the expert’s report and started to go line-by-line through his estimate. The expert’s report did not make clear where he obtained the data he was relying upon, but he had to have obtained it somewhere, right?

Q: Now, line eighteen of your estimate on page nine is your estimate of the cost to recaulk around every window?
A: That’s correct.
Q: Where did you get that figure?
A: I pulled up the project specifications, determined the total measurement of caulk that would be needed, and multiplied that number by $3.19.
Q: What does that figure of $3.19 represent?
A: That’s the price of caulk per foot, including labor.
Q: Where did you get that number?
A: Well, that’s around what it costs.
Q: Where?
A: Here.

Now we were on to something. It was clear the witness had performed only a cursory analysis of the work the Association intended to do, and likely hadn’t put much work into confirming the unit prices of each line item on his estimate.

Q: How much of that $3.19 figure represents materials and how much represents labor?
A: I don’t know, but they add up to $3.19.
Q: How do you know this costs $3.19?
A: I’ve been doing this a long time.
Q: Are there different types of caulk available on the market?
A: Of course.
Q: Do they all cost the same per foot?
A: …. They’re around the same.
Q: What specific kind of caulk does this calculation include?
A: The kind the Association intends to use.
Q: But you don’t know specifically how much that kind of caulk costs?
A: No.
Q: But you do know that when you add labor costs, it comes to $3.19 per foot?
A: Right.
Q: And how do you know this?
A: I know this because I’ve been doing this a long time. Over time I’ve been able to develop a “feel” for cost estimating, such as the labor and materials costs.
Q: So, in this case you have a “feel” for what it would cost someone to purchase and install this many feet of exactly this type of caulk, purchased from a specific distributor, and installed by a waterproofing contractor located in the Northeastern United States?
A: …Yes.

Now we were rolling, and it was time for the fun to begin. We took the witness through several additional line items on his report in the same fashion—asking him how he knew the specific costs of such everyday items like peel-and-stick flashing, mortar netting, and UV-resistant elastomeric coating. The witness started getting visibly frustrated. In all probability, he had a fairly good idea what these items cost (at least much better than anyone else in the room), but it was clear that no one had ever told him he would need to be prepared to explain his reasoning and methodology to a roomful of skeptics, and to walk them through his analysis.

Sensing an opportunity for a case-killing sound bite, I leapt into action like a dingo deftly snatching a baby from its bassinet on a breezy Australian evening. After several years, this was sure to be my most significant contribution to the case, by far:

Me: Let me just back up here for a minute. Just for the record, and to make sure I understand you correctly, is it fair to say that “construction cost estimating is not an exact science, and sometimes—like in this case—you just gotta go with your gut?”

The witness paused, and his pupils narrowed. “I blew it,” I thought to myself—I had violated the cardinal rule against asking one too many questions. And now, this witness was going to make me pay for my sins. He looked around the room, as if to make sure everyone was paying attention, as a slow grin began to develop.

“This guy…” he said in hyper-articulated fashion, as he raised his hand and pointed directly at me, “this guy, right here, gets it. Somebody FINALLY understands what I’ve been trying to tell you all!”

Motions to preclude the witness’s opinion were filed in due fashion and were sure winners. I wish I could tell you that our motions were granted, and that the Association was left without an expert on damages, but I cannot—the case settled before it got that far.

Mark D. Shifton is a partner with the Princeton, New Jersey, and New York City offices of Gfeller Laurie LLP. Mark focuses his practice in the areas of complex civil and commercial litigation in the state and federal courts in New Jersey and New York. He routinely represents owners, design professional, and contractors in cases involving construction disputes and catastrophic property losses.

The Owner and Contractor must negotiate the factors or events constituting a contingency. They often involve items not fully developed or understood when construction commences. For example, the plans might not be fully developed so increased costs associated with the completed plans may qualify. Likewise, unexpected material cost escalations or force majeure events might also qualify.

As a general rule, Owners usually do not want contingency funds used to correct Contractor errors. Conversely, Contractors usually do not want contingency funds used for work that otherwise would qualify for a change order. However, these general rules are broken so frequently that even calling them general rules might be misleading. For example, the Owner may permit the use of contingency funds for bidding errors arising from the Owner’s rush to obtain a bid before the Contractor could fully develop its bid. In these circumstances, the Owner may put a cap on the amount or a limit on the type of errors that qualify (e.g., bidding errors up to a maximum of $10,000). Likewise, a Contractor may permit unforeseen conditions (that would otherwise qualify as a change order) on a project where the Owner does not have the ability to obtain additional construction funds. In short, contingencies narrowly tailored to the specific needs of the project are mutually beneficial.

The process for releasing contingencies is also heavily negotiated. For example, does the Contractor or Owner control the release or is the release subject to collaboration? Many contingencies provide the Contractor with an absolute right to use the contingency for a discreet number of items. Other items might fall within the Owner’s control or be subject to a collaborative process. Alternatively, the Contractor might have the right to access contingency funds up to a certain dollar amount after which the Owner controls or the process is collaborative. Regardless, it is imperative that the Owner get an accounting of the use of the contingency funds. This is often done in conjunction with the payment application process.

Another heavily negotiated aspect of contingency clauses involves what happens to the residual contingency funds at project’s end. For example, the parties start with a $100,000 contingency that is drawn down to $15,000 at project’s end. What happens to that $15,000? The answer is whatever the parties negotiated. For example, if the parties split the contingency 50/50, then, at least in theory, the Contractor will be less likely to use the contingency fund during construction. For example, if the Contractor is earning 15 percent profit on contingency work, the Contractor would have to burn through the entire $100,000 contingency to get $15,000. If, on the other hand, the Contractor burned through $50,000 of the contingency, then the Contractor would earn $4,500 on the contingency work, but another $25,000 for splitting the residual contingency. In short, the Contractor may make more money by splitting the residual contingency rather than devoting it entirely to the contingency work.

If, however, the residual contingency goes 100 percent to the Owner, then the Contractor has little incentive to realize cost-savings on the project. All cost-savings activities would be at the Contractor’s sole expense. Conversely, if the Contractor gets 100 percent, then the Owner should vastly broaden the items for which the contingency must be used to avoid a windfall to the Contractor.

In summary, contingency clauses provide the parties with the flexibility to cover unexpected costs. Carefully crafted, these clauses provide a vital tool for the parties to achieve balance and certainty in the construction realm where both are in short supply.

Drew Colby is a director of Kenney & Sams in Southborough, Massachusetts, where his construction law practice encompasses both transactional matters and payment and performance disputes. Drew’s clients comprise the entire spectrum of the construction industry from owner/developers to subcontractor, as well as design professionals. He is universally recognized as one of the foremost leaders in construction law by industry members and counsel, a reputation earned over the course of his 35-year career. Clients appreciate Drew’s hallmark honesty, accessibility, and pro-active style. Indeed, the trust developed by his depth and breadth of knowledge often results in Drew acting as Outside General Counsel for clients on a wide range of issues. Drew earned an AV Preeminent Rating from Martindale Hubbell, which represents the highest possible rating on both legal ability and ethics based upon the confidential opinion of peers and judges.

The Digital Photograph

Technologies emerging today will be the everyday best practices of tomorrow, case in point: the digital photograph. It wasn’t long ago that digital photographs were considered next gen. The use of digital photographs in the courtroom was a contentious topic only 22 years ago, until they were ultimately accepted as a routine and integral element of typical data collection for experts around the globe. Fast-forward to today where photographs are not remotely considered a new technology. However, the use of 360-degree cameras, videos and drones are advancing the photographic documentation of a site.

The old idiom that a picture is worth a thousand words is relevant in claims and litigation, especially before and after a loss occurs. Consider how a collection of photographs or videos could expedite and simplify the claims process by providing valuable contextual facts through pictures, thereby simplifying root cause analyses, liability evaluations and other claims adjusting concerns. Some may question if the raw data collected depicts a fact? The answer is no, raw data is more like facts without context, potentially skewing the truth rather than clarifying it. For instance, what if a photo of a construction worker without a hardhat was taken at the very instant he removed it, to simply wipe his brow and put it directly back on his head? This would not be indicative of the worker’s typical practices or of the contractor’s commitment to safety. What happens if the same worker is injured moments later after the hardhat was placed back on his head? There is a risk that collected information is taken out of context and misused and could potentially adversely affect the claims process.

However, in most respects, the pros outweigh the cons. The integration of new and emerging technology can provide a more holistic understanding of risk, incident facts and adjudication of claims. Information collected via photograph or video allows the claims team to have a greater and clearer understanding of the facts rather than requiring them to surmise what actually happened in the event of a loss.

The Reliability of Technological Data

Data retrieved from such emerging technologies has nearly unlimited potential in the legal context to help resolve some of the weaknesses that plague current forms of evidence. One of the most prevalent weaknesses in litigated matters stems from concerns about the reliability and credibility of witnesses, whether an eyewitness, fact witness or expert witness. Utilizing technological data as an additional source of evidence helps eliminate the concerns about the fallibility of human memory, biases and intentional deceptions that undermine witness testimony. Technology effectively audits and augments facts, while increasing the reliability of testimony.

A more contentious foreshadowing of the future will occur when experts use technology as a tool in the rendering of an opinion (i.e., presenting their case and proving their hypotheses with the use of emerging technologies in lieu of typical, current methods). One foreseeable way both the plaintiff and defense attorneys and experts will agree upon emerging technologies will be the acceptance of their reliability in the scientific community.

Absent this acceptance, experts will label the opposition’s opinion as “junk science” or “unfounded.” This would apply in either direction. For example, if the plaintiff alleges defects to a property, extrapolates across a property and presents such opinions following the completion of destructive testing, the defense may have difficulty rebutting their opinion through non-destructive testing. Typically, in a skeptical world, once there is a universal acceptance or acknowledgement of something new or unknown, the opposition is going to have a hard time making their case.

Technology in the Courtroom

Attorneys are burdened with the task of proving that any information is reliable and must look to supplement the information with data retrieved from technological advancements. Fortunately, technology is on the verge of making attempts to deceive much more difficult to get away with. The full scope of how our increasingly networked and documented lives are able to catch deceptions can be hard to fathom. With the accumulation of data from smart technology, such as wearable devices, comes an even better way to determine the credibility of witness testimony.
To utilize technology in this manner, courts would need to employ the use of technological data as supplemental evidence for comparison to what someone is testifying.  Of course, this is, in circumstances, limited to the type of data collected by the specific device worn by the witness. For instance, data stored by a smart watch most likely would not be able to disprove inaccurate eyewitness identification, however, smart watch data could be useful in proving that a witness lied about their location on the day in question.

The procedure to which liability is determined shouldn’t be any different whether data from technology is considered in an accident or property loss claim. This is especially true for experts who are generally engaged post-loss and will be on the front lines providing consultation to the claims professional and attorney. The difference between the way this was done in the past versus where the industry is going directly correlates with technology. Specifically, the availability and type of data produced, the reliability of the data itself and the subsequent development of expert opinions is greater with the use of technology.

The Common Uncertainties of New Technologies

It is uncertain whether the claims and litigation community, on both the plaintiff and defense sides, may universally accept the data produced by technology. Though, there is surely a universal cause for concern with perhaps rudimentary tasks performed. In any scenario, the good comes with the bad, and vice versa. With a law that is lagging, it is unclear how the data can or will be used by the plaintiff or defense to make their case, and how the opposition will react.

Clearly the use of technology yields many pros, and conversely additional cons. Voluminous data will undoubtedly provide more details on cause and origin investigations and more accurate determinations of liability across the board. However, certain questions will arise through the claims and litigation process that test the rules of expert testimony and limits of the scientific method in any case where a new technology or technological method of data collection is utilized to support an expert’s opinion. The insurance and legal communities will be pressed to make policy interpretations and push the law forward, respectively, as emerging technologies evolve.

Innovation will never slow down. Claims resolution can benefit from technology through cost efficiency, making determinations quicker and finding solutions prior to performing extensive testing. Additionally, claims professionals, attorneys and experts can utilize technology to assign liability more quickly and definitively. The new and emerging technologies that were once just concepts are here and being implemented in all facets of life. Although, the question remains: how can this aggregated big data help us reduce overall risk? The answer is simple: by turning technology into insights and always having foresight. 

Andy Guerra, PE, SE, is a senior structural engineer with Envista Forensics in Denver.  He has over twenty years of structural engineering experience including structural design of residential, commercial, educational, hospital, mixed-use, and religious structures. He has experience with the analysis, design, and detailing of gravity, lateral force resisting, and foundation structural systems utilizing concrete, steel, masonry, and timber structural elements. In addition, Andy has experience with the investigation of structures to determine causes of design and construction deficiencies and identifying the responsible parties.

Terence Kadlec, PE, is the practice leader of the Envista Forensics Construction Group in Denver, Colorado. In this role, Terence practices as an expert focused on construction defect claims and litigation, manages the group’s matters, provides mentorship and technical oversight internally, and is a thought leader externally educating professionals on past, current, and emerging trends in the industry. His technical focus in forensic engineering has included investigations following fires, explosions, vehicular impacts, weather/catastrophe events, structural failures, civil/earthwork failures, and construction deficiencies. His experience with construction and design defects has included evaluations in civil and structural engineering matters, specifically related to residential, commercial, industrial, marine, and mixed-use properties.

Envista Forensics is a corporate member of DRI.

1. Information Gathering

Start with some basics, as information takes time to collect and opposing counsel may be motivated to move the claim forward quickly.

• Any and all material correspondence, contracts, subcontracts, invoices, plans, drawings, change orders and photographs from the beginning to the end of the project.
• Identify all current and former employees who worked on the subject project, including identifying their project responsibilities.
• Establish a main contact person to the matter, preferably one who knows the information you will need without needing to reference documents, call other people, etc.
• Send out preservation letters to obtain communications on personal electronic devices and/or on-site construction surveillance video systems.

2. Identify the Scope of Services

Most disputes fail to settle due to the lack of clarity surrounding the scope of services in relation to the defects alleged. Identifying the governing scope of services is paramount in developing liability defenses. The plain language of the contract will often describe the scope of services. However, often times the scope is expanded beyond the contract. It is critical to identify all project documents and correspondence that may be used to establish an expanded scope of services by the claimant.

3. Identify the Scope of Work for Other Parties Involved

One aspect of the initial evaluation process that is often overlooked or neglected when a construction defect claim comes in is performing a detailed analysis of the scope of work for other relevant project participants. It is critical to understand the scope of work of other parties involved in the project and the claim, as this will enable you to determine who was acting within their contracted scope and who was not. Performing such analysis will shed light on who may have additional liability or complete liability other than your own, as well as who else should be at the table to share in defense costs for the claim. An additional tip is to request proof of each party's business licenses, as well as proof of good standing, to ensure that the parties are licensed to perform the work that they ultimately undertook on the project. There may be liability issues for other parties related to performance of work for which they are not licensed, which opens up other avenues for filing cross claims to reduce your own liability.

4. Duty to Defend and Indemnity Considerations

In addition to reviewing project contracts to identify entitlement and scope of work issues, the contract should be reviewed to determine if the insured is required to indemnify or defend other parties on the project. Further, the insurance policies applicable to the claim may have terms under which the insured is named as an additional insured on another party’s insurance policy (or vice versa). What other policies does your insured have for the project? Do any of them have time on the risk provisions? Do any of the policies have indemnity or duty to defend clauses? Answering all of these questions from the outset is important, as they affect not only the defense of the claim, but also any ultimate resolution of the claim.

5. Issue Reservation of Rights Correspondence

Initial investigation may ultimately lead to the conclusion that there is no coverage under the policy. When initially agreeing to accept the tender of a new claim, it is important that the insured is advised that such acceptance is subject to a reservation of rights to withdraw acceptance of the defense based upon newly discovered facts that result in a change of analysis.

6. Considerations for Retaining Expert Witnesses

Construction defect litigation can be rather complex and is heavily driven by expert testimony. Thus, it is critical to have a competent expert witness who can serve as a credible independent party tasked with the role of determining whether a claimed defect can actually be attributed to the insured. The expert must also be able to clearly explain complex issues in a manner that can be easily understood by a judge and/or jury. Selecting an expert is critical to the success of the case and should be evaluated on a case-by-case basis to best reflect the factual and jurisdictional merits of each claim.

We can all agree that the easiest way to avoid liability for construction defect claims is preventing them altogether. However, since prevention of a claim is not always possible, it is important to take early action upon receipt of a new construction defect claim to limit liability and ensure the most efficient expenditure of defense costs.

Anthony da Fonseca is an attorney with Kenney & Sams in Southborough, Massachusetts. focuses his practice in the areas of design, construction, commercial real estate, business litigation, and insurance matters, and routinely works with clients to develop risk management strategies to avoid litigation. He has extensive experience in prosecution and defense of commercial construction and design professional claims.  Anthony also represents clients in connection with drafting and negotiation of complex design and construction contracts and has experience working with all common construction industry contract forms.