What’s warranted?

Kevin O’Beirne, PE, CSI, CCS, CCCA
You are at the checkout of the big-box store, purchasing an item of consumer electronics worth about $200.  As the sales clerk runs your credit card for the purchase, he asks in a bored tone, “Would you like to purchase an extended warranty for this?”

“Hmm,” you intone thoughtfully,  “What’s it cover and what’s it cost?”

Slightly less bored now, the clerk replies, “Replacement of defective parts for a period of two years from purchase. You pay for shipping, though. The extended warranty is $79 extra.”

You cough disbelievingly and sputter, “What?!  For a $200 item that will last only three years if I’m lucky? That warranty is robbery!  No thanks.”

Unfortunately, in the above scenario you’ve done more research and made a more-informed decision on the extended warranty than do most project owners and design professionals when specifying equipment worth tens of thousands or hundreds of thousands of dollars.  In the preparation of construction documents, design professionals frequently specify costly warranties that provide little useful benefit for the project Owner—in effect, requiring the Owner to pay $279 for the $200 item that will be useless in three years no matter what.

Black’s Law Dictionary defines a warranty as:

A promise that a proposition of fact is true… An assurance by one party to [an] agreement of [the] existence of fact upon which [the] other party may rely. It is intended precisely to relieve promise of any duty to ascertain fact for himself and amounts to promise to indemnify for any loss if the fact warranted proves untrue…

While this explanation may be clear to an attorney, most design professionals or project owners require a more in-depth explanation. This article presents the basics of specifying warranties for construction projects, which is a good deal more involved than merely specifying a warranty of some particular duration in the associated spec section.

Understanding the drivers
What are the parties to a construction contract hoping to gain from a given warranty? The answers can be opposites, depending on which entity one considers. Ultimately, it is a game of risk-shifting, but risk is transferred at a financial cost, with appropriate contract language and careful construction contract administration.

Owners, supported by their design professionals, would probably prefer to have ‘cradle-to-grave’ protection for their newly constructed project (and the materials and equipment incorporated therein), but without having to pay much for such protection. On the other hand, material or equipment suppliers (e.g. manufacturers, fabricators, distributors, or vendors) consider themselves to be in the business of furnishing commodities, not warranties, and usually seek to limit their risk and liability to the greatest extent possible. When one considers their position, the risk associated with a warranty can be significant, but can be challenging to price accurately.

By tacking on too many dollars to cover the risk of required warranties, a supplier may price itself out of winning the purchase order for that item. Thus, by limiting their risk via limitations in their standard warranties, suppliers improve both their competitive position and their profitability. In general, suppliers tend to be savvier about assuming contractual or warranty-based risk than many design professionals and project owners.

Contractors and subcontractors also provide warranties to the owner. While all players involved in a project normally seek to reduce their risk to the extent possible, contractors are perhaps more comfortable with assuming risk—after all, construction is a very risky business. As a result, contractors, perhaps more than most entities involved in a construction project, understand how to price such risk.

In other words, the owner wants protection, the supplier may prefer to avoid providing it, and the contractor cares mostly about what it will cost.

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