During my last 12 years working for a global Engineering and Construction (E&C) business, I had the duty of managing contracts and contract risk as a P&L owner and business manager. In the group I managed, a large portion of the work was with the Federal Government. More specifically, with the Department of Defense. It was during this time I learned about a Duty to Proceed (DTP) clause and its painful implications.
Simply stated, this clause requires the contractor to proceed with the performance of the scope, pending the resolution of any dispute on a project.
Duty to Proceed Clause – The Lesson Learned
During my tenure in the E&C world, one of my teams managed the survey and clearance of unexploded ordinance (UXO) at a large Navy Military Construction (MILCON) site in the Pacific Islands. Our contract called for the surface clearance of a large tract of land that had seen significant carpet bombing in World War II.
In the UXO business, the term ‘surface’ refers to the surface down to two feet. A dispute arose when we discovered the Navy had previously graded the area we needed to clear, and had done so numerous times since the late 1940s.
The numerous disturbances had the effect of smearing and burying the UXO across the island and down to the coral base rock, which was six to eight feet below surface in most places. Clearly the bid was to do a surface clearing, and clearing the area down to bedrock was a “change condition”.
The DTP clause required us to proceed with the work while we addressed the dispute through the Federal process, using a Request for Equitable Adjustment or REA.
We considered stopping work, however, in fear of being in default with one of our largest clients, we plowed forward with a scowl. What should have been a one-year profitable action turned into a multiple year boondoggle.
Needless to say, long after we completed the work, the REAs were denied. The government took the position that we should have been aware of this condition. The result; we lost millions of dollars on the project.
By the way, for all of you who say the government always pays, re-think your position.
How Does This Impact You?
So how does this relate to the private commercial construction space? The Duty to Proceed clause is no longer just a relic of the Federal market, it is now a part of private commercial contracting. Working in construction finance, we review every client’s contract where they’re seeking construction funding.
In reviewing these contracts, we now see some form of the Duty to Proceed in 95% of all lump sum construction contracts between the General Contractor and the subcontractor. These are often flow down provision from the owner to the prime.
As a receivable’s finance lender, we fund on receivables for work that is approved and within the contract budget. Therefore, we cannot fund on any work that is part of a dispute resolution. So when we see this clause in our client contracts, it poses uncontrollable risk.
It causes us to seek risk mitigation in one of several ways. This can include increased fees, lower advance rate and at times, denying funding. If we fund, we require a DTP rider in the funding contract. This makes the client acknowledge the clause exists in their construct contract. It also assures they will not seek funding on any work done under this provision.
Furthermore, in the example above, having a duty to proceed will force you to continue to work and maintain the project schedule even when you’re certain the dispute represents a change condition. Absent this contract term, you likely have some leverage, possibly including the right to stop work or rights to a signed change order before proceeding.
Understand Your Risk
Construction contracts are often long, confusing and hard to review for the non-legal mind. However, your contracts outline just about every possible occurrence on the project and the remedy for such. At minimum, read your contract and understand your risks and what remedies are available if a dispute occurs.
At CapitalPlus, we work with our clients helping them to understand and mitigate the risk, but we are not lawyers. When entering into a contract, don’t take shortcuts. Get legal advice and work smart to negotiate a balanced contract.
Yes, there will come a point at which you accept certain customer terms or one party walks. When you do accept onerous terms and conditions, be sure your bid is clear. Call out assumptions regarding your understanding and expectation of the project site conditions. With a DTP and a dispute, you may have to continue to work while the dispute is resolved. Having an unambiguous bid and clearly documenting and communicating site changes will serve you well.