What’s warranted?

May 4, 2016

[1]SPECIFICATIONS
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.

Express warranties
Warranties fall into two general categories: express and implied. Both are typically construed as consistent with each other and cumulative in effect—in other words, one type of warranty does not supersede others.

Express warranties are specific promises made by the seller of goods or services and include oral representations, written representations, descriptions, representations made via samples and models, and proof of prior quality. Examples include:

When there is a defect in the construction (or in the materials or equipment incorporated therein) after it is certified as substantially complete, the owner has many potential remedies. Among the most important and useful is the contract’s correction period provided in the General Conditions of the construction contract.

When the defect is found during the contract’s correction period for any element of the construction, the owner is entitled to have the contractor return to the site and remedy the problem. This remedy supplements the owner’s other rights that, if successfully enforced, may result in the contractor being required to pay the owner monetary damages.

The correction period provision is not a limitation of the contractor’s liability, or an exclusive remedy—rather, it provides an additional remedy available to the owner. Given the extensive protection afforded to the owner by the correction period provision, the need for special warranties that last only one year is questionable.

When defects are discovered before a construction element is certified as substantially complete by the design professional, completion of the remedy is a condition precedent both to being eligible for substantial completion and receiving progress payments for the defective work. It is common to refer to the correction period as ‘the one-year warranty’ or as the ‘guarantee period,’ but such incorrect terms may foster confusion and potentially reduce the owner’s ability to enforce performance of the remedy and its right to other relief under the contract.

Most of the contractor’s obligations under the contract, including its commitments under the general warranty and guarantee, do not expire on final payment or even after the one-year correction period. Rather, they apply as long as the applicable statute of limitations allows the owner to enforce them. Only the ‘specific performance’ component (e.g. the correction period) of the owner’s rights has a contractual time limit. The duration of the statute of limitations (and the contractor’s general warranty under the General Conditions) is discussed later in this article.

When contractors receive the owner’s notice of a defect requiring remedy under the correction period, the onus is on the contractor to perform. Accordingly, consistently using clear terminology—such as ‘correction period’ for the one-year specific performance obligation instead of muddying terms such as ‘one-year warranty’—allows entities interpreting the construction documents to differentiate between the correction period and the general warranty and guarantee. Failure to do so could result in an interpretation the general warranty is limited by contract to only one year.

The typical term of a correction period is one year after substantial completion. Standard contract documents in common use in the industry usually require the performance and payment bonds, when required for the contract, remain in effect during the correction period. The premiums charged by sureties for performance and payment bonds are usually based on a one-year correction period. Thus, the owner has the assurance the surety is available to honor the contractor’s obligations during the correction period if the contractor fails to do so. This also typically reduces the need for the owner to withhold retainage during the correction period.

If a correction period longer than one year after substantial completion is required, and the owner desires the bonds remain in effect throughout the correction period, such bonds may be available from the surety. However, their cost will increase compared to the standard one-year correction period. The alternative is to require a surety-backed maintenance bond for that part of the correction period beyond the first year. (A more detailed discussion of contract bonds is beyond this article’s scope.)

A defect in the construction is a breach of the contract—which remains in effect after final payment and the end of the correction period. Recognizing this important obligation and the breach-of-contract consequences, most contractors will promptly honor their correction period responsibilities. However, the owner’s alternatives in the event of non-performance under the correction period include formally terminating the contractor’s performance (typically in accordance with the provisions of the performance bond) and serving notice on the contractor’s surety to perform the contractor’s obligations.

When an element of the construction has to be corrected or replaced by the contractor during the correction period, some contracts require renewal of the correction period for that work element for another year. Some contractors object to such a provision, arguing the correction period could thus theoretically continue without end. Owners and design professionals counter such arguments by indicating the owner is entitled to one year of defect-free use of the completed construction.

Under the contract’s general warranty and guarantee provision of the General Conditions, the contractor guarantees the construction will comply with the contract documents and warrants the work will not be defective. The contractor’s general warranty is not limited by any specific period, although the duration for which it can be enforced is governed by the applicable statute of limitations in the jurisdiction where the project is located.

The start and end times of statutes of limitations varies by jurisdiction, but are often four or six years after completion of construction. During much of this time (excluding the correction period), the contractor’s performance bond is not in effect. Therefore, to get a reluctant contractor to honor the obligations under the general warranty after expiration of both the correction period and the performance bond, the owner may have to resort to legal approaches, such as a civil lawsuit. When owners seek relief under the terms of the general warranty after expiration of the correction period and performance bond, the onus will typically be on the owner to ‘prove’ the problem was caused by a latent defect in the contractor’s work, instead of by normal wear-and-tear, misuse, or other degradation that is not the contractor’s fault.

Manufacturers’ standard, printed warranties for a given product usually promise to remedy defects in the items materials and workmanship for a specified period. It is important to review and understand their limitations, because they can be significant. Manufacturers’ standard warranties often stipulate they:

Since many manufacturers’ standard warranties contain such limitations, it is important for the owner and design professional to read and understand them during the design phase. It must be determined whether such limitations, when viewed alongside the contractor’s obligations under the correction period and general warranty and guarantee, necessitate requiring a manufacturer’s special or extended warranty.

Special or extended warranties are modified from the manufacturer’s standard warranty to suit the needs of a given transaction, usually in response to a contractual requirement. Perhaps the most common form is an extension of the normal duration of the manufacturer’s standard warranty.

Given the cost of removing and reinstalling a defective item is often as expensive as the replacement parts, sometimes the extra cost to include removal and reinstallation in the manufacturer’s special warranty is desirable. However, such decisions should be made on a case-by-case basis, with full information on the cost and availability of an extended warranty.

Any requirement(s) the contractor shall furnish special guarantees of materials or equipment should be clearly indicated in the associated specifications. The General Conditions (or Division 01 specifications) often require special warranties and guarantees on materials and equipment run to the benefit of the owner. Legally effective warranties and guarantees can be difficult to draft and, when doing so, it is wise to obtain the advice of the owner’s legal counsel.

Implied warranties
Implied warranties are assurances presumed to be made by sellers in a transaction of materials or equipment, based on the circumstances of the sale. They are interpreted by courts and arbitration boards, and are initially covered in the version of the Uniform Commercial Code (UCC) in effect in the project’s jurisdiction.

An implied warranty of merchantability warrants the:

To be merchantable, the goods must conform to an ordinary buyer’s expectations. Terms of purchase such as “as-is” or “with all faults” disclaim (negate) an implied warranty of merchantability. Many sellers seek to expressly disclaim furnishing implied warranties of merchantability, arguing such warranties are subjective.

Implied warranties of fitness-for-use arise where the seller, at the time of the contract, has reason to know the particular purpose for which the goods are required, and the buyer is relying on the seller’s skill and judgment in selecting goods appropriate for the intended use or purpose.

For example, if the buyer of an equipment item advises the seller at the time of purchase the intended application is in a corrosive environment, without further specifying the desired materials, the seller is obligated under the fitness-for-purpose implied warranty to advise the buyer of the appropriate item to purchase, based on the seller’s knowledge of the item. However, because larger equipment items are often specified with detailed, descriptive requirements for a specific application (‘purpose’) selected by the design professional or owner, understandably suppliers often seek to disclaim any implied warranties of fitness-for-use.

Implied warranty of title assures the buyer of the seller’s right to sell the goods, and that such goods are not otherwise subject to patents held by others, or other intellectual property rights that might infringe on the buyer’s right to purchase.

Specifiers should understand, in many jurisdictions, implied warranties may be unintentionally disclaimed by conspicuous contract language. At times, the parties may elect to specifically exclude implied warranties (particularly for fitness-for-use); reasons for explicitly excluding certain implied warranties may arise due to negotiation between the buyer and seller.

Conversely, when the owner and design professional desire that such warranties fully apply, careful attention should be paid to drafting the contract language, particularly in the specifications. While implied warranties are not specifically written into the contract documents (if they were, they would be express warranties), certain specifications language can result in the nullification of an implied warranty.

Figure1Location in the construction documents
As with any topic related to construction contracts, one cannot properly specify the requirements without knowing where they are, or should be, located amidst hundreds of pages of specifications and contractual requirements. As the content of the Division 00 documents—also known as “Procurement and Contracting Requirements” in MasterFormat—are seemingly-complicated fine print, many designers and specifiers tend to be less familiar with them than they should be. This is their first, and probably most significant, error when warranties are improperly specified.

Like other provisions, the various types of required warranties are covered in different locations in the contract documents, including the General Conditions and Supplementary Conditions, the Division 01 specifications, and in “Part 1–General” of individual specifications sections where materials and equipment are specified.

The most significant warranty protections afforded to the owner are typically in the General Conditions; they are the correction period and the contractor’s general warranty and guarantee. In accordance with American Institute of Architects (AIA) A521/Engineers Joint Contract Documents Committee (EJCDC) N-122, Uniform Location of Subject Matter (2012), these are covered at the locations shown below:

Warranties in standard General Conditions.
Warranties in standard General Conditions.

When reviewing the contract’s warranty requirements, one should always review the General Conditions and Supplementary Conditions. This is particularly important when using non-standard Division 00 documents, such as those developed by a particular owner.

MasterFormat
MasterFormat
includes 00 63 36−Warranty Form. Rarely seen in use by this author, this number and title is allocated where a specific form or special language for a warranty is required. This number and title, however, is probably more-commonly used in project filing systems rather than as an actual document bound into the construction documents.

MasterFormat also includes 01 78 36−Warranties. In this section (or its parent, 01 78 00−Closeout Submittals), one would specify the general procedural and administrative requirements for warranties. This is an alternative location where a specimen warranty form with mandatory language for special warranties may also be bound. Specifiers may use 01 78 36−Warranties, to:

Such language would serve as a mechanism for the design professional, when reviewing warranty submittals during construction, to enforce the required warranty start dates, because many manufacturers’ standard warranties are written to commence running at a time earlier than many owners and design professionals would like. In some cases, the standard warranty may be expired before the item is even installed into the construction.

SectionFormat
In individual specifications sections, SectionFormat (2007) indicates warranties should be listed as a required submittal in the article titled, “Closeout Submittals” in “Part 1–General.” For this provision, SectionFormat advises:

Describe submittal of warranties, without repeating the terms of the warranties (which should be specified elsewhere in Part 1). Warranty documentation may include a sample warranty, which may be an action submittal, and the final executed warranty document, which is usually not an action submittal, although it usually does require A/E review for accuracy.
−Coordination: Conditions of the Contract; Section 01 78 00–Closeout Submittals; Section 01 78 26−Warranties.

Specific requirements for special or extended warranties should be indicated in the applicable specifications section(s), in an article titled, “Warranty” or “Bond” (the latter referring to a manufacturer-furnished bond such as a roofing bond, which is rarely backed by a surety and is therefore typically little more than a fancy-looking manufacturer’s warranty), which is typically the last article under “Part 1–General.” For this provision, SectionFormat requirements are summarized below:

Part 1 Article on warranties.
Part 1 Article on warranties.

Of course, there is no substitute for clarity. To effectively specify useful warranty requirements, one must use appropriate language, grammar, and writing style that is easy to understand and interpret, and is well-coordinated with the warranty provisions of the General Conditions and the other construction documents.

Recommended practices regarding warranties
The following recommendations are for design professionals relative to warranties:

  1. By the end of the design development or preliminary design phase, establish with the owner the Division 00 documents that will be used. Read and understand their provisions on the correction period and the contractor’s general warranty and guarantee.
  2. During the design phase, obtain from suppliers—especially those who may furnish key items of material and equipment—the language of their standard warranties and review and understand their limitations.
  3. Also during the design phase, obtain from suppliers information on optional special or extended warranties that are available, and request and obtain information on the costs associated therewith. If the owner’s preference for a certain special warranty requirement is unusual for the specified manufacturers, present the proposed special warranty requirements to them and find out if the special warranty could be made available and its associated cost.
  4. Communicate the suppliers’ warranty information and costs to the owner. Ensure warranty discussions with the owner include a mutual understanding of the protections the owner receives under the contractor’s correction period, and general warranty and guarantee. Obtain the owner’s instructions on the desired warranty requirements, and ensure the owner is aware of the costs associated with and limitations of special or extended warranties.
  5. Clearly specify the warranty requirements in the proposed construction contract documents. Obtain advice from the owner’s legal counsel when necessary. Ensure such requirements are properly coordinated with the correction period and general warranty and guarantee provisions of the General Conditions.
  6. During the construction phase, obtain, as submittals, the warranty language proposed by the supplier and enforce compliance with the contractual requirements regarding warranties.
  7. During reviews of construction phase submittals, carefully evaluate the proposed warranty language because suppliers may later take the position approved warranty language governs over the terms of the construction contract between the owner and contractor. Some suppliers may even interpret the warranty language governs over their own purchase order with the contractor.
  8. When equipment is placed into long-term storage between shipment from the factory and permanent installation into the construction, require and enforce on the contractor implementation of the supplier’s recommended actions for long-term storage, such as preventative maintenance (e.g. turning rotational equipment) and proper storage environment. Document such measures were properly performed, to reduce the potential for voiding the manufacturer’s warranty.

When a latent defect is discovered during the correction period, the owner should promptly notify the contractor in accordance with the notice provisions of the contract; frequently, these are in the General Conditions. The temptation to bypass the contractor by directly approaching the supplier should typically be resisted, so the contractor can determine how best to implement the correction. As the defect’s extent and complexity may be unknown at the time notice is given, a pre-determined, stipulated time-to-correct may be counterproductive.

The owner should understand the correction may take some time to implement. Conversely, the contractor should act promptly to implement the remedy. In most cases, the design professional’s scope of services will not include services during the correction period; therefore, serving such notice on the contractor is typically the owner’s responsibility.

Conclusions
This article has indicated there are several types of warranties in effect on a typical construction project, and there are costs and concerns associated with requiring unusual special or extended warranties. During the design stage, warranties should be discussed with the owner in consideration of the costs and benefits associated with the various warranty alternatives. Once the warranty requirements are established via mutual understanding between the owner and design professional, such requirements should be clearly specified at the proper locations in the construction documents, in a manner that allows the owner to properly and effectively enforce its rights under the contract.

The author gratefully acknowledges the advice and comments on drafts of this article from Gerard Cavaluzzi, Esq. (Kennedy/Jenks Consultants [Croton, New York]), Lee Orosco, FCSi, CCS, SSGB (Carollo Engineers [Phoenix, Arizona]), Jason Williams, PE, CCCA (Arcadis [Buffalo, New York]), and Chris Matthews, PE (Arcadis [Columbia, Maryland]).

Kevin O’Beirne, PE, CSI, CCS, CCCA, is a principal engineer and manager of standard construction documents at Arcadis in Buffalo, New York. He is a professional engineer licensed in New York State and Pennsylvania with 29 years of experience designing and constructing water and wastewater infrastructure. O’Beirne served as the FY2014−2015 chair of the Engineers Joint Contract Documents Committee (EJCDC) and is a member of CSI’s MasterFormat Maintenance Task Team. He can be reached at kevin.obeirne@arcadis.com[2].

Endnotes:
  1. [Image]: http://www.constructionspecifier.com/wp-content/uploads/2015/08/OBeirne-2013-07.jpg
  2. kevin.obeirne@arcadis.com: mailto:kevin.obeirne@arcadis.com

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