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Bid Alternates

What Are Bid Alternates?

Bid alternates are specific components of a construction project that are not included in the base price of a bid or proposal.  Alternates are called out separately on the request for proposals or bid form, along with a request for pricing aside from the contractor’s base bid.  In most cases, the owner’s decision to include an alternate in the project is not determined until the time of the contract award.

How And Why Should Alternates Be Used?

Bid alternates can be used by an owner to price out various options it has in mind for a project.  Examples include different or additional materials, equipment or systems, construction methods, or completion dates.  A bid alternate may also be simply a defined expansion of the project scope.  Similarly, on a private project, and unless otherwise specifically instructed by the owner not to provide alternates, a contractor may propose alternates as a means to value engineer or otherwise add value to the project.

An Owner who asks for alternates should be careful to provide clear instruction to bidders, so that the owner can compare bids on an “apples to apples” basis.  Contractors should take care to follow the instructions to bidders, and seek clarification if necessary to ensure its bid is responsive to the owner’s requests.  On the other hand, owners should take care to ensure that information provided to bidders to price alternates is as detailed as the information provided for the base scope of work.

On public projects, providing the same opportunity to all bidders is the general measure to assess the legitimacy of the bid and award.  Indeed, and misuse of alternates is a common reason for bid disputes.  For example, in Mechanical Contractors Assn. of Cincinnati. v. Univ. of Cincinnati, through its representative, the University encouraged bidders to propose their own alternates for materials or design work, which was not shared with the other bidders.  Mechanical Contractors Assn. of Cincinnati, 153 Ohio App.3d 466, 2003-Ohio-1837, ¶ 27 (10th Dist.). Further, some, but not all of the bidders were allowed to clarify, or revise and amend their initial bids.  Id. The court held that the bids could not have been judged on an “apples to apples” basis, thereby falling short of the public bidding requirements in Chapter 153 of the Ohio Revised Code.  Id. at ¶ 13, 27.

Application Of Bid Alternates After Contracting

An owner may also elect to ask for alternate pricing for likely change orders during the competitive bidding process, which would leverage the owner’s pre-contract position to obtain better pricing.  The owner can reserve the right to reinstate alternates at the contractor’s bid price.  Depending on the contract language, the alternate work would then be added to the contractor’s scope through the change order process.

Property owners and developers enter into a variety of contracts to restrict the use of real property.  For instance, a developer may wish to maintain the architectural integrity of a neighborhood or prevent a property use that might disturb the community’s character.  A seller of property may want to require future buyers of the property to honor certain promises.  Creating such a restriction requires attention.

I. Requirements

Generally, contractual obligations only bind the parties signing the agreement.  To bind subsequent property purchasers or successors-in-title, the contracting parties must create a restrictive covenant that “runs with the land.”  Ohio courts examine the parties’ agreement to determine if the agreement runs with the land using three criteria:

1. There must be a clear intent of the original contracting parties for the covenant to bind successors;

2. The restrictive covenant must touch and concern the land; and

3. There must be privity of contract.

See LuMac Dev. Corp. v. Buck Point Ltd. Partnership, 61 Ohio App.3d 558, 562, 573 N.E.2d 681 (1988); Capital City Community Urban Redevelopment Corp. v. City of Columbus, 10th Dist. Franklin No. 08AP-769, 2009-Ohio-6835, ¶ 13.

The intent of the parties is an important element.  The parties should clearly express their intent for the agreement to bind subsequent purchasers and “run with the land” in a written agreement that is recorded with the county recorder to ensure enforceability.

To “touch and concern” the land, the agreement must burden or benefit the property.  A covenant that is personal in nature does not run with the land. Lone Star Steakhouse & Saloon of Ohio, Inc. v. Quaranta, 7th Dist. Mahoning No. 01 CA 60, 2002-Ohio-1540, ¶ 17.

The final element requires that the original contracting parties be in “privity of contract.”  This common law principle provides that a contract cannot confer rights or impose obligations upon a person who is not a party to the contract. Said another way, only parties to contracts (and their direct successors) should be able to sue to enforce their rights.

II. Example Cases

To better understand restrictive covenants, it is helpful to review cases where Ohio courts examined them.  One such case involves a historic theatre.  A property development company, Capital City Community Urban Redevelopment Corporation, bought the Lincoln Theatre on the near east side of Columbus, Ohio in 1991.  Capital City Community Urban Redevelopment Corp. v. City of Columbus, 10th Dist. Franklin No. 08AP-769, 2009-Ohio-6835.  Capital City’s president, Charles Adrian, had a personal history with the theatre.  Adrian grew up in a neighborhood near the theatre.  As a child, he watched Saturday double-feature movies there.  When Capital City sold the theatre, at Adrian’s direction, it included two, specific provisions in the real estate purchase contract to restrict the theatre’s use.  One provision required the buyer and subsequent owners of the theatre to provide double-feature movies each Saturday for $1 or less to benefit the neighborhood children.  A second provision required the buyer to install and maintain a bronze plaque on the front of the building to honor Adrian.  The deed did not include the specific restrictions.  It did, however, reference the parties’ purchase contract, saying the deed was “subject to” the restrictive covenants in the purchase contract.

Eventually, the City of Columbus took title to the Lincoln Theatre.  When city officials removed the bronze plaque, Adrian had another plaque affixed to the theatre, which the city also removed.  The city did not use the theatre to show movies.  Instead, the city announced plans to use the theatre for jazz music lessons for children.  Adrian and his company, Capital City, sued to enforce the restrictive covenant referenced in the deed.  Id., ¶ 5.  Although they were unsuccessful at the trial level, the Court of Appeals for the Tenth District ultimately found that the agreement was a restrictive covenant.  Despite the fact that the agreement seemed personal in nature to Adrian, the appellate court found that the covenant indeed, “ran with the land.”  The city was required to maintain the bronze plaque and show Saturday movies for as long as feasible as soon as the theatre became operational.  Id., ¶ 19, 23.

In another case, a seller of commercial property sought to restrict selling groceries or alcoholic beverages.  BM-Clarence Cardwell, Inc. v. Cocca Dev., Ltd., 5th Dist. No. 16 CA 3, 2016-Ohio-7751, 65 N.E.3d 829.  Presumably, the seller sought to protect its own business that would be conducted at an adjacent property.  The buyer agreed to the restriction, which was plainly written in the parties’ contract and included in the deed.

After purchasing the property, the buyer leased it to Dollar General.  Dollar General intended to sell groceries, among other items.  Id., ¶ 8-9.  The property’s seller sued both the buyer and Dollar General, to enforce the restrictive covenant and prevent Dollar General from selling groceries.  Id., ¶ 14.

The Court found the words used by the parties to be important.  It recognized, “The covenant contains the phrase ‘successors and assigns.’  The use of these words plainly indicates an intent that the covenant run with the land.” Id., ¶ 49. The Court also found important the fact that the seller made the restrictive covenant a matter of public record by including it in the recorded deed.  A lengthy and conspicuous paragraph in the deed plainly described the restrictive covenant.  The Court therefore held that the covenant “ran with the land” and prevented Dollar General from selling groceries.

The Court of Appeals for the Fifth District refused to enforce a written memorandum which purportedly evidenced an agreement between family members, indicating that the brother owned the front 1.5 acres and his sister owned the 3.52 back acres of a property.  The court found that the family failed to create a covenant running with the land.  The parties did not adequately describe their agreement in the written memorandum and expressed no intention to bind subsequent property owners.  The court found, “[W]e note that no mention of assigns, heirs, successors or other similar language is utilized.”  Keil v. Thompson, 5th Dist. Morrow No. 03 CA 10, 2004-Ohio-6976, ¶ 14.  The successors of the brother and sister were therefore unable to enforce the memorandum.

III. Recommendations

When entering into a real estate transaction, pay careful attention to restrictive covenants.  To ensure a covenant runs with the land, best practice is to explicitly and clearly state the parties’ intention.  Use language to make clear that the covenant binds “successors and assigns.”  Consider including unequivocal language such as, “the parties intend for this covenant to run with the land.”  Include the restrictive covenant as a material term in a written purchase agreement in a conspicuous place.  Also include the restrictive covenant on the deed or other instrument transferring the property and record that instrument with the county recorder.  Ensuring subsequent purchasers have notice of the restriction is key to enforcement.  With careful attention, parties can effectively restrict future owners’ use of property.

Proper insurance is a crucial risk management tool for contractors, design professionals and project owners. Each is generally required by contract, statute or sense of self-preservation, to purchase and maintain appropriate insurance coverage. Since everyone has insurance, it is easy to assume that most risks on a construction project are covered. The purpose of this article is to correct that misperception by describing the typical scope of protection offered by three forms of insurance commonly found on a construction project: Commercial Liability Insurance, Builders Risk Insurance, and Professional Liability Insurance.

Of course, the exact coverage provided by an insurance policy can only be accurately assessed by reviewing the policy at issue, which can vary widely depending on the form, carrier and endorsements. It is important to review every policy benefiting your project to ensure it is appropriate for the particular scope of work, and complies with both the contract and state law.

Commercial General Liability Insurance

Almost all construction contracts require that contractors and subcontractors carry Commercial General Liability (“CGL”) insurance. Good contracts also specify the CGL industry forms permitted for the project, the minimum coverage amounts, the required endorsements, and the policy duration. Generally speaking, CGL policies typically cover (1) an occurrence, (2) causing an injury to a person or property, (3) that is not subject to an exclusion. While coverage may appear broad, each of those three elements gives an insurer a way around covering your loss.

The primary purpose of a CGL policy is to protect the contractor and owner in the event an accident on the jobsite causes property damage or personal injury to a third-person. If a carpenter drops a hammer, injuring a bystander or her property, a claim by the bystander against the contractor should be covered by the contractor’s CGL policy. By adding the owner as an additional insured, coverage is extended to any claim by the bystander against the owner. Of course, things are almost never that simple. For example, while the term “occurrence” seems self-explanatory, courts’ interpretations are inconsistent. As a rule of thumb, a foreseeable or expected event is not an “occurrence,” whereas an unforeseeable or “fortuitous” accident (like a dropped hammer) is more likely a covered occurrence.

The most frequently litigated question in the construction context is whether the CGL policy covers defective work performed by the insured contractor, or any resulting damage. The current national trend is for courts to construe faulty workmanship as an “occurrence,” and the resulting damage as “property damage,” both of which are covered under the policy. But, Ohio courts take a narrower view.

In Westfield Ins. Co. v. Custom Agri Systems, Inc. 133 Ohio St.3d 476 (2012), the Ohio Supreme Court held that faulty performance is not an “occurrence” because it is “not unexpected.” The Court also held that the faulty work itself is not “property damage” under a CGL policy. Instead, in Ohio, CGL policies will only cover unanticipated damages resulting from faulty construction.

Typically Covered (Subject to Exclusions)

  1. Bodily Injury and Property Damage caused by an unforeseeable event or accident.
  2. Some consequential damages caused by a covered event (policy specific).
  3. Property damage resulting from an event independent of, but made possible by, defective work.
  4. Personal and advertising injury, such as libel, slander and copyright infringement.
  5. Injury or damage resulting from completed, but improperly performed or installed work.

Typically Not Covered (Subject to Endorsements)

  1. A foreseeable or expected event.
  2. Purely economic damages, not arising from or incidental to bodily injury or property damage.
  3. A contractor’s defective work.

Important Exclusions:

  1. Reasonably expected or anticipated injuries;
  2. Employer’s liability for injury to employee;
  3. Damage to the contractor’s own property or work, whether in progress or completed; and;
  4. Damage to the property that is being restored, repaired or replaced.

For example, defective installation of a roof on an existing structure is not an occurrence or property damage, but a subsequent rain storm that infiltrates the defective roof may be an occurrence, and any resulting property damage to the preexisting property would be covered by the CGL policy. The occurrence must be an event independent of the defective work, which is made possible as a result of the faulty construction.

The following summary describes the typical coverage and limits of CGL insurance. As noted however, CGL policies can differ depending on the industry form and endorsements, which should be included in your contract documents.

Builder’s Risk and Property Insurance

Most contracts also require the owner to purchase and maintain property insurance that protects the work-in-progress and certain materials, which remains in effect throughout construction. This type of property insurance is referred to as “builder’s risk insurance,” and it is most often written on an “all-risk” policy. The term “all-risk” implies that the insurance will protect the owner against any loss or damage to the property. However, as is true of CGL policies, the protections actually afforded by builder’s risk insurance may be quite limited.

Under a typical builder’s risk policy, the insurer agrees to pay for “direct physical loss” or “damage to the covered property” during the course of construction, unless the loss is subject to an exclusion. The “covered property” usually consists of the building or structure under construction, as well as machinery, equipment, materials, and supplies that will become a part of the improvement.

In more general terms, builder’s risk insurance typically covers damage to the work during the course of construction. The general purpose is to protect against losses arising from the negligence of contractors, as well as certain “acts of god” like fire and lightning. Many courts have held that builder’s risk insurance is, by its nature, intended to cover only new work, not preexisting structures. Accordingly, if a project entails improvement to an existing structure, the owner should consider purchasing an endorsement, or expanding the policy’s definition of “covered property.”

In contrast to CGL policies, builder’s risk insurance only offers “first-party” coverage. First-party coverage protects the insured against damage to its own property, not for the claims of a third- party. Accordingly, a builder’s risk policy should name each owner, contractor, subcontractor, and design professional as insureds. Also, unlike CGL policies, builder’s risk policies are not written on industry forms, and can differ more significantly from carrier to carrier. In fact, the most commonly litigated issue arising from builder’s risk insurance is whether an owner breached its contract by purchasing less coverage than was required. This highlights the importance of reviewing and understanding your builder’s risk policy.

Another common coverage issue is the degree to which builder’s risk insurance covers costs indirectly resulting from the accident, such as delay damages, acceleration costs, lost use, and other consequential effects. Most builder’s risk policies exclude “consequential” damages and similar losses, however these “soft costs” may be added by a coverage extension.

The following summary describes the coverage generally afforded by builder’s risk insurance. Once again, this summary merely describes industry norms, which vary by carrier and endorsements. Minimum coverages, and the party responsible for purchasing builder’s risk insurance, should be clearly defined in the contract documents.

Typically Covered (Subject to Exclusions)

  1. Loss to the work during construction, caused by negligence or “acts of god,” typically including:
    Fire; Lightning; Explosion; Windstorm and hail; Smoke; and Sprinkler leaks.
  2. Loss or damage to equipment or materials to be incorporated into the work.
  3. Losses independent of, but made possible by defective design or construction.
  4. Temporary structures.

Typically Not Covered (Subject to Endorsements)

  1. Existing buildings or structures (may be added by endorsement).
  2. Property damages after completion.

Important Exclusions:

  1. Consequential loss (soft costs);
  2. Faulty design or construction;
  3. Collapse of a building or structure;
  4. Damage caused by excavation activities;
  5. Freezing and water damage;
  6. Damages caused by corrosion or rust; and
  7. Malicious Mischief.

Professional Liability Insurance

In many ways, the potential for loss arising from poor design work is greater than any other risk on a construction project. There is a possibility that the owner, contractors and subcontractors will suffer substantial delays, bodily injury or property damage in the event of defective design. Further, depending on the project delivery model, all claims will flow through the owner, which in many cases is the only party in privity of contract with the architect or engineer. This risk is somewhat reduced on design-build projects. Regardless of the delivery model, it is crucial that the design professional on your project has professional liability insurance tailored to the project.

Professional liability insurance covers losses arising from services considered professional in nature, typically architectural, engineering or other design services; and policies generally cover the “wrongful act” or “professional negligence” of an architect or engineer. A wrongful act may be defined, depending on the carrier, as a negligent act, error, omission, and sometimes a breach of contract.  Dishonest or fraudulent acts are generally excluded.

In addition to the acts and actors covered by professional liability policies, coverage differs from CGL and builder’s risk insurance in several respects. Most importantly, professional liability policies do not require bodily injury or property damage to trigger coverage. While those damages are covered, professional liability insurance may also cover some nonphysical and purely economic damages caused by design errors and any resulting delays. On the other hand, defense costs of the insured are often deducted from the policy limits. Additionally, professional liability insurance is typically written on a “claims-made” policy, meaning that the claim must be made during the policy term. CGL policies, on the other hand, are most commonly “occurrence-based,” meaning coverage depends on the date of occurrence, not the date of the claim.

Another important characteristic of professional liability insurance is that it may cover contractual liability. However, there is often a gap in coverage when the breach of contract does not rise to the level of “professional negligence.” While a professional standard of care is typically incorporated into design contracts, technical breaches – which in many cases can cause substantial harm – may not constitute professional negligence. For example, if an architect fails to turn over plans or respond to a contractor’s request for information within the time required, there may be a breach, but not professional negligence. Coverage for this sort of breach can be added through an endorsement for “insured contract coverage.”

To summarize, professional liability policies generally provide the following coverage:

Typically Covered (Subject to Exclusions)

  1. Damage caused by a “wrongful act.”
  2. Bodily injury.
  3. Some consequential damages (policy specific).
  4. Economic damages.
  5. Contractual liability resulting from professional negligence.

Typically Not Covered (Subject to Endorsements)

  1. Construction management services (may be added by endorsement).
  2. Dishonest, fraudulent, malicious, or criminal conduct.

Important Exclusions:

  1. Willful/Reckless Acts;
  2. Fines of Governmental Agencies;
  3. Contractual penalties or liquidated damages;
  4. Faulty workmanship; and
  5. Delay costs (included in some policies)

Clearly, not all risks on a construction project are covered by insurance. Understanding the general scope of common insurance forms is an important first step in any effort to address gaps in insurance coverage, and ensuring proper compliance with your contract, state law, and your appetite for risk. Consulting with your legal counsel and insurance professional is a good way to gain that understanding.

This document has been prepared as a general reference document for informational purposes. The information contained herein is not intended to be and should not be construed as legal advice. Each circumstance should be considered and evaluated separately, and possibly with involvement of legal counsel.