Issues With Construction Contractors’ Warranties – Part 2
A previous article cautions construction companies about “warranty” and “correction of work” provisions that may extend their warranty obligations well beyond the one- or two-year period that most contractors believe they’ve signed up for. This article discusses warranty language that can make the contractor a guarantor of the architect’s design, or leave it holding the bag for what should be its subcontractor’s responsibility.
Beware of warranties of performance
In the standard forms, the contractor warrants only that all work and materials will be new and contract-compliant. But some owner contracts ask the contractor to warrant that the work, materials and equipment will perform to advertised standards; or will be suitable for the project; or will comply with applicable building codes or other legal requirements.
For example, the State University Construction Fund Agreement includes the following:
The Contractor, at the convenience of the Fund, shall remove, replace and/or repair
at its own cost and expense any defects in workmanship, materials, ratings,
capacities or characteristics occurring in or to the work covered by the Contract.
Ratings, capacities and characteristics of specified systems or equipment are the designer’s responsibility, not typically that of the contractor. That applies equally to language, commonly included in developer contract forms, requiring the contractor to warrant that its work will comply with applicable codes or laws.
These kinds of warranties may be fair in a design-build agreement, where the design-builder has accepted responsibility for the overall design of the project. But in a design-bid-build scenario these are design issues, beyond the contractor’s responsibility or control, and should not be accepted. The only exception is where the contract documents have properly delegated design responsibility for a discrete component of the project to the contractor. In such a case, carefully crafted language warranting performance and code compliance of that discrete component may be justified, but care must be taken to assure that any such performance warranties are limited to the component for which design has been delegated.
“Or equal” and “Substitution” provisions are especially likely to carry unjustifiably broad warranty, guarantee or certification requirements. An “equal” product or system is functionally equal to that named, and sufficiently similar so that no change in related Work will be required. A “substitution” is an acceptable substitute, in the designer’s opinion, for what was specified. For public work the contractor has an absolute right to furnish an “equal,” but a “substitution” is always up to the owner or its designer. In either case the final decision of whether a proposed product or system is an “equal” or an acceptable “substitution” is left to the good faith discretion of the designer of record. So the compatibility of the “equal” or the “substitution” with “design intent” is the responsibility of the designer of record.
Nevertheless, contracts often include language like the following:
Contractor shall make written application to Engineer for review of a proposed substitute
item of material or equipment that Contractor seeks to furnish or use. The application:
shall certify that the proposed substitute item will: a) perform adequately the functions
and achieve the results called for by the general design, b) be similar in substance to that
specified, and c) be suited to the same use as that specified.
Contractors should resist such language, especially when applied to products or systems submitted as “equals.”
Be sure your vendors’ and subcontractors’ warranties match your own commitments
A contractor relies upon its subcontractors to respond to owner warranty claims for their own work. That means the subcontracts and purchase orders need to include the same warranty and “correction of work” obligations that are present in the contractor’s prime contract or subcontract, including matching scopes, start dates and durations for both warranty clauses and “correction of work” clauses. The most common mistake in this regard is writing a subcontract or purchase order that incorporates the vendor’s proposal as an exhibit or otherwise incorporates it by reference. Although incorporating a proposal for its scope may be convenient, it is far safer to re-write scope requirements into the subcontract itself, thereby avoiding the unintended incorporation of limited warranties that fail to cover the contractor’s obligation to the owner.
Subcontract warranties should match the durations you’ve committed to
Under the standard contract documents, warranty and correction obligations begin to run from the date of substantial completion. But some owner agreements, including modified versions of the standard agreements, delay this commencement date until final acceptance, final completion or final payment; or they may provide for a longer “correction” period, such as two years or even five years. (While there is nothing inherently wrong with postponing warranty start dates to a time after substantial completion, disputes can arise about whether a particular problem is attributable to a deficiency in work or materials versus a result of owner misuse or abuse.)
In any event, a delayed start date or an extended period for correcting defective work or materials can cause a contractor unplanned expense if it hasn’t been careful to contractually obligate it subcontractors and vendors to identical start dates and correction periods. This is a special risk when using purchase orders that may not address the issue; or even if they do , that fail to anticipate an over-ride in a contrary “confirmation notice” from a particularly savvy vendor.
Special issues with purchase orders
Particular attention is required when dealing with purchase orders for materials or equipment. Contractors commonly sign proposals that limit the scope and/or time of product warranties, as well as the extent of the remedy to be provided. Particularly in design-build or delegated design situations, the contractor must be vigilant in obtaining appropriate written assurances from its vendors that their equipment will function as represented, and in eliminating language that unreasonable limits the dollar value of its vendor’s liability.
Also, most suppliers’ standard warranties begin upon delivery of the product to the site. Depending on when that delivery occurs, the warranty could expire even before the project becomes substantially complete. Similarly, the contracts favored by elevator companies (or by others whose product might be put into use before the project is substantially complete) specify that warranty and correction obligations commence when the equipment is first placed in operation, rather than upon project completion. The result may be that the contractor has to pay its vendor to provide “warranty” repairs even if they become necessary within a year after project completion.
Additionally, common supplier warranties commit only to replace a defective item, without providing for the labor necessary to remove it and install its replacement, or for remedying other work disturbed by the replacement process. This kind of limitation can leave a contractor on the hook for the costs for substantial labor costs as well as owner consequential damages. Part of the solution is to write your own purchase order, superseding the vendor proposal and incorporating the warranty requirements of the prime contract. But even a carefully-drafted purchase order can be defeated by a written “confirmation” from the vendor if the purchase order lacks proper precautionary language.
Another challenge the contractor faces on this score is that the general statute of limitations against a vendor of materials or equipment (as opposed to a subcontractor who both furnishes and installs the item) is four years from delivery of the item. Since the contractor’s general warranty obligation to the project owner is typically six years from substantial completion — and since product delivery is almost always well before substantial completion of the project — the contractor may have to answer for a defective product at a time when its recourse against the supplier has expired. Once again, the solution is to carefully craft an appropriately extended warranty in the purchase order.
The Warranties, guarantees and certifications you give about your products and workmanship create obligations that can live with you for a long time. Make sure you understand them before you commit to them. Negotiate away unreasonable requirements when you can, and in all events make sure you get equivalent assurances from your subcontractors and other vendors.