Identifying Warranty Risks
The special or general conditions of many construction contracts contain warranty provisions. A typical warranty clause may require the contractor to repair or replace defects in materials or workmanship for up to one year after acceptance of the work by the owner. This type of provision reflects risks that most contractors or subcontractors can identify and analyze based on experienced warranty or call-back costs.
When dealing with equipment vendors, contractors and subcontractors can readily compare their own warranty exposure to the provisions of a manufacturer’s standard warranty and decide whether to seek an extended warranty provision in a purchase order.
In addition to the typical one-year warranty, construction contracts may also obligate the contractor to other warranties of longer duration. These extended warranties can be imposed on a contractor in a less customary manner that results in a potential pitfall for the unwary. Two of the less traditional methods of establishing extended warranties are described below.
Many complex projects may be constructed in phases. At the end of a phase, the owner may take beneficial occupancy of that particular phase. However, the same contract may contain a different provision stating that final acceptance of equipment, e.g., the mechanical equipment, does not occur until all phases are complete.
If the warranty clause clearly states that the warranty period commences upon “final acceptance of the entire project,” the contractor/subcontractor could face a warranty obligation that starts months or even years after the equipment was first used. Many manufacturers’ warranties explicitly state the date of warranty commencement, often a set period of time after delivery or upon first use of the equipment. In a phased construction situation, standard manufacturer’s warranty protection may not be available to the contractor by the time the contract’s warranty period commences.
Extended Warranties in the Detailed Specifications
While warranties are still typically set forth in the general or special provisions of contracts, the detailed specifications may contain extremely long warranty obligations, such as “lifetime” warranties. Other contracts may require a twenty-year warranty against leaks in the curtain wall or leaks in the caulking. Certain extended warranties are customary, e.g., an extended roof warranty, particularly since that guaranty often relates back to the manufacturer’s warranty. However, wider use of the specifications to detail extended warranties is a pitfall for both contractors and subcontractors.
Many general contractors’ estimators may not have sufficient time for a detailed review of each division of the technical specifications to discover any special or extended warranties. Consequently, there is no pre-contract effort to negotiate this clause out of the contract. If the clause is unknown, then the risk is unknown. Specialty firms or suppliers who study the technical specifications in detail may identify these extended warranties and act to protect themselves. Under these circumstances, general contractors or upper-tier subcontractors may find themselves with “warranty gaps” between the warranty obligations and actual warranty protection.
Checklist to Reduce Warranty Risk
The following are some practical actions that may assist contractors in reducing the risk of a warranty protection gap:
1. Specifications review
If time does not permit a detailed review of all sections of the specifications, the introductory articles of each section or part of each division should at least be scanned. General requirements such as warranty obligations may be stated in these introductory articles. A detailed pre-proposal review provides the best protection since, on private contracts, it may be possible to reduce or eliminate this extended warranty by negotiation or qualification to the proposal.
2. Proposal review
If a quotation or proposal from a supplier or subcontractor provides that the warranty obligations are limited by duration or to the requirements of a particular contract provision, this is a signal that there is probably another warranty provision in the technical specifications.
3. Purchase order scope
Purchase orders on projects with phased construction should expressly include the general and special provisions in the scope of work. If the scope is limited to the technical specifications, a potential dispute may arise regarding whether the contractor has any warranty protection because of the delayed start of the warranty period under the terms of the contract.
4. Bond coverage
The performance bond provided by the contractor should include the warranty obligations the contractor is assuming. Any performance bond obtained from a vendor or subcontractor should provide equal protection. This is generally a function of the language of the bond and its interpretation by the courts. Contractors should be aware before accepting performance bonds that limit the surety’s obligation to a fixed number of years.
5. Warranty enforcement provisions
A review of subcontract/purchase order forms should be made to determine whether any warranties obtained by subcontractors or vendors can be assigned to the contractor or the owner or can be enforced by the contractor or the owner. If necessary and feasible, a clause should be included requiring subcontractors/vendors to flow the same warranty obligations down to the next tier.
Source: Interface Consulting International, Inc.
Released: July 30th, 2007 11:00 AM
Phone: (713) 626-2525
Fax: (713) 626-2555