• So You Want to Build a Hotel! - Top 10 Things to Know for a Successful Project
  • March 22, 2010
  • Law Firm: Claramargaret H. Groover - Orlando Office


    Facts make the law.  Consequently, clear terms and conditions in your construction or renovation agreement and clear, decisive, and timely job documentation showing what transpired on your project from Day One will likely determine whether you can win any dispute that arises on the project.  “But”, you say, “I am constructing a project, not writing a book.”  The process can be orderly and simplified when you are familiar with the most important areas to address as a Construction Owner.   A well written contract and a thorough understanding of the process will help ensure that you lay a foundation for claims prevention and resolution with your contractor and others at the end of construction.

    1.         Determine your project delivery system -- Design/Bid/Build or Design/Build Will you engage the design professional first and then bid the job to a contractor?  This traditional approach -- design/bid/build -- requires the owner to deal separately with the two other main players: the architect and the contractor to impact the process.  In this context, the architect/engineer can be an advocate for the owner to protect against construction defects and deficiencies during construction.  In addition, the architect/engineer remains liable for a design that meets or exceeds building codes and is delivered timely, along with critical information provided in response to contractor inquiries during construction.  In contrast, a design/build strategy allows you to deal only with one entity for both the design requirements and the construction requirements.  This system works well for programmed projects under franchisor agreements such as the hotel that you intend to operate.  A third strategy is to contract separately with each trade.  Many factors can make this third strategy legally problematic for the owner including the expertise you have, as owner, to manage and coordinate the trades and the time away from your core business as a hotel operator.

    2.         Present the contractor with your own form of agreement -- Contractors tend to insist upon your using their forms of agreement because they are familiar with the terms allocating risks to you, as owner. Industry standard documents, such as the AIA[2] and AGC[3] forms, result from collaborations with many industry professionals but most of these forms tend to be favorable either to the architect or to the contractor.  Consequently, you, as owner, may have a more involved role than you may be prepared to perform.  Your agreement should contain modified industry standard provisions familiar to the contractor but which reflect your processes and your expectations of the contractor.  A balanced contract allocates risks to the party best able to prevent the risk from causing a loss AND helps to keep the price under control.  A good marriage, indeed!  After all, you hired the contractor because he or she is the expert in building your type of facility.  You want to capitalize on that expertise on your project, not excuse the contractor from using it.  The enlightened owner knows and controls its risks, among others its duty to provide the contractor with adequate drawings and specifications and certain information such as soils reports and notices; to pay for work performed and, in some instances unforeseen contingencies; and  to cooperate and deal in good faith to resolve issues that arise.

    3.         Hire a licensed contractor -- A contractor may want to “give you a better price” because he is not licensed to perform the work you require him to perform.  Even the adage, “You get what you pay for”, may not hold true here.  The local building department in most jurisdictions will have a right to stop work on your project if the contractor is not licensed.  Depending upon the jurisdiction, you may need to confirm that the contractor is licensed by the state and through the local municipality or county.  You can easily check online in most instances to confirm the contractor’s license status.

    4.         Confirm that the contractor is insured -- An indemnity provision in the contract promises that the contractor will protect you from losses sustained.  Losses to others, however, are not covered by this indemnity and not all reimbursement can be covered by the contractor out of his own pocket.  At a minimum, the contractor should provide the following coverage:  workers’ compensation in limits dictated by the state legislature where the work is performed; general liability insurance and excess umbrella for injuries that occur on the job site; contractor’s property coverage; and, for design/build projects, professional liability to protect against loss resulting from design error and omissions.  You, as the owner, will want to secure builder’s risk coverage in order to protect against losses resulting from, among other things, adverse weather before project completion.

    1. Require performance and payment bonds

                6.         Pay the contractor for work performed and reserve your rights to dispute the remainder -- Performance is the condition for payment, or should be.  What does the contract say?  Many times the owner’s definition of “performance” does not match the contractor’s.  Owners must pay for work rightfully performed, often within strict deadlines under state law.  However, in circumstances where the owner is justifiably not satisfied, the contract should allow the owner to make a partial payment. 

    Florida’s Prompt Payment Law - Particular attention to notice requirements will help to preserve the owner’s authentic entitlement to withhold money from a non-performing contractor.  Invoking the dispute resolution provisions of a contract containing step-negotiation and mediation will assist the owner to manage the dispute with the contractor in an attempt to avoid its escalating into construction liens or lawsuits being filed.

    Florida Construction Lien Law - This statute governs the rights of those who provide labor, services, and materials for improvements to the property.  Owners have rights and obligations under this statute as well.  The requirements to perfect a lien and to protect the property from liens are highly  technical and can be quite inflexible.  

                7.         Anticipate changes to the work -- The likelihood that you will have to make a change during construction is nearly 100%.  The contract can describe the change process and include unit pricing at the beginning of construction when the owner has the best bargaining power over price.  Contract changes may become necessary for a variety of reasons.  Some changes cannot be anticipated while others may result from contractor error.  Whether the additional costs result from a legitimate change or from a “field condition”, a dispute may arise.  How these disputes are handled during construction determine the degree of difficulty in closing out the project without claims.  A good contract will address this process from the beginning.

                8.         Analyze and address construction defects and deficiencies along the way -- You may decide to hire a construction manager to monitor the quality and timeliness of construction whether you use the traditional method or a design/build approach.  The contract should address how work is tested and who pays for the test.  In addition, the contract should address how the contractor proceeds to accomplish the work within the time limitations.

                9.         Know how long you have to bring a legal claim -- State law will dictate how long you have to bring a claim for defects and deficiencies that are known (patent defects) and those that are unknown (latent defects).  You cannot count on the fact that you are treating a defective condition in hopes of repairing it to extend your time to bring a claim against the party at fault. Claims statistics show that issues arising in the first 6 years are more likely than not resulting from contractor fault.  After that, the owner is perceived to have failed to maintain the property.  Check the state’s statute of repose to find out the absolute last opportunity you have to bring a claim.  For example, in Florida the legislature shortened the statute from 15 years to 10 years in 2006.  Owners cannot bring any claim for conditions that are discovered outside of 10 years after occupying the facility.

                10.       MEDIATE disputes.  Don’t litigate -  Every owner is well-advised to include a step-negotiation and mediation provision in the contract.  Just as the use of mediation provisions in franchise agreements has enabled the AAHOA membership to resolve disputes with and to enlighten its franchisors, the dispute resolution provisions including mediation serve the construction owner.  A good dispute resolution provision will request that the parties’ senior management or principals first meet to discuss the claim and, failing resolution, proceed to mediation with a neutral third party to assist with settlement.  Mediation results in a voluntary and confidential agreement of the parties, not a decision as to the outcome of the claim itself, as from an arbitrator or judge.  Mediation as a condition to instituting a lawsuit or demanding arbitration is an effective and efficient way to resolve claims.  For example, over 85% of all court-ordered disputes are resolved through this means in Florida since mediation was first implemented in 1985.


                The owner has the most leverage at two stages of the process:  the beginning and the end.  Once the contract is signed, the project is virtually under the control of the contractor and the bargaining strength of the owner is more limited.  A well-written contract will protect both parties against their fading memories of good intentions “after the honeymoon is over.”

    Claramargaret H. Groover, Esquire, is a Florida Bar Board Certified Construction Lawyer and a certified mediator, practicing in Orlando, Florida.  She concentrates her practice on construction claims avoidance and resolution in commercial and residential disputes.  You can find more information about her at www.claramargaretgroover.com and you can reach her at [email protected].  The information provided in this article does not constitute legal advice regarding any specific situation.  If you have questions about your specific design and construction matters, please consult a qualified attorney.

    [1] The author has built upon essential elements of construction focusing her interpretation on the best interests of the Owner.  She gratefully acknowledges that the inspiration comes from her colleague, Greg Cashion of Smith, Cashion & Orr, PLC in Nashville, Tennessee, who granted permission to use the format springing from his collaboration with their other colleagues in the American Bar Association, Forum on the Construction Industry.  The collaboration resulted originally in a “Top 10” list for construction projects generally.

    [2] American Institute of Architects

    [3] Associated General Contractors