The Contractor’s Approach to Risk Allocation IV:
Acceptance of Work Clauses
This article is the fourth in my series of discussions about contractual risk allocation. This installment focuses on acceptance of work clauses and discusses the manner in which parties to the contract can best allocate the risks associated with acceptance clauses. Acceptance clauses can shift a significant amount of risks to contractors, but they are the type of clause that can easily be drafted in a way to ensure equitable allocation as discussed below.
Acceptance of Work Clause:
On its face, an acceptance of work clause might not appear to be one that shifts a significant amount of risk. After all, every contract contains core expectations that the contractor will complete the work and the owner will accept it upon completion. But, when one considers that acceptance triggers payment, completion, and warranty obligations, the significance and risk associated with the acceptance clauses becomes more apparent.
Continuing performance obligations, substantial and final completion, warranty obligations, payment of retainage, and profit margins on Guaranteed Maximum Price contracts are only some of the issues associated with acceptance clauses.
Acceptance clauses are often written in the negative. The clauses often contain language that is more focused on relieving the owner of acceptance obligations rather that providing the contractor a target for earning acceptance. Consider the following clause that comes from the EJCDC C-700:
Contractor’s obligation to perform and complete the Work in accordance with the Contract Documents shall be absolute. None of the following will constitute an acceptance of Work that is not in accordance with the Contract Documents or a release of Contractor’s obligation to perform the Work in accordance with the Contract Documents:
- observations by Engineer;
- recommendation by Engineer or payment by Owner of any progress or final payment;
- the issuance of a certificate of Substantial Completion by Engineer or any payment related thereto by Owner;
- use or occupancy of the Work or any part thereof by Owner;
- any review and approval of a Shop Drawing or Sample submittal or the issuance of a notice of acceptability by Engineer;
- any inspection, test, or approval by others; or
- any correction of defective Work by Owner.
EJCDC C-700 §6.19(C)
This clause places a significant amount of risk on the contractor. Initially, the clause emphasizes that the contractor’s obligation to perform and complete the work is absolute. The clause also specifically exempts many of the benchmarks that contractors rely on to gauge compliance and completion from the items that may signal acceptance. The fact that a contractor cannot rely on the Engineer’s and Owner’s inspections, tests, approvals of shop drawings, payment for work, and the approval of independent inspection companies places the contractor in a very precarious position. As drafted, this provision places all of the risk on the contractor for acceptance.
The provision could be better written to more equitably assign risk. For example, well-defined acceptance criteria that are absent from this provision could provide a more reliable target for both the contractor and owner. A clause that says, “Work performed in accordance with the Contract Documents, shop drawings and submittals, has been approved by the owner’s inspectors, and that passed all post-performance inspection and testing criteria is deemed accepted” would give both parties a more reliable set of criteria and a more equitable allocation of risk.
Consider the possibility that a situation might arise where a contractor, owner, and engineer disagree as to the interpretation of specifications and performance criteria. As a result, the Owner may refuse to formally accept the Work and trigger the contractor’s obligations to perform extra work while withholding payment of retainage. This situation could induce a default and put both parties in a less-desirable position. With a more equitable provision, the parties might have been compelled to proceed differently and in a manner that promoted negotiation and cooperation.
The above provision is not the only one contained in the EJCDC that places a significant amount of risk on the contractor. The clause governing final acceptance and payment provides for subjective review by the Engineer in determining final completion. Because final completion controls release of retainage, this provision creates a risk of non-payment based on a third-party’s subjective review of work-in-place.
B. Engineer’s Review of Application and Acceptance:
If, on the basis of Engineer’s observation of the Work during construction and final inspection, and Engineer’s review of the final Application for Payment and accompanying documentation as required by the Contract Documents, Engineer is satisfied that the Work has been completed and Contractor’s other obligations under the Contract Documents have been fulfilled, Engineer will, within ten days after receipt of the final Application for Payment, indicate in writing Engineer’s recommendation of payment and present the Application for Payment to Owner for payment. (remaining portions intentionally omitted) EJCDC C-700 §14.07(B).
The subjectivity introduced by this clause creates a moving target. In most situations, a contractor is still able to hit this target, but the scenario where the target is continually shifted is not hard to envision. If the subjectivity is removed, both the owner and contractor will benefit because objective criteria allow all parties to evaluate and understand the requirements for acceptance and work towards that mutually desirable goal. Simply removing or changing the word “satisfied” in the clause can significantly change the risk allocation. Consider this alternative to the first sentence of the clause, “After Engineer verifies that all work has been completed and has been accepted, as evidenced by compliance with on-going project controls, testing standards, benchmarks, and milestones, Engineer will…” If changes to section 6.19 are also made, the modified contract terms provide a more objective and equitable option.
When negotiating acceptance of work provisions, consider modifying terms that contain subjective criteria. In their place, add objective criteria, milestones, or other identifiable benchmarks to enable cooperation and teamwork towards achieving the mutually desirable goal of completion. Owners should keep in mind that acceptance does not relieve contractors of warranty obligations. The owner’s ability to avoid acceptance, as an inducement of further performance, can be removed while still protecting the goal of a properly constructed project.