What is a Construction Defect?

It seems logical to begin the discussion by first defining a construction defect.  Although logical, this is not so simple since there seems to be no standard definition for the term. 

Marianne Sparks at the American Re-Insurance Company has summarized this dilemma best by stating that “what constitutes a ‘construction defect’ is essentially defined by state laws and court definition and interpretation.  In defining “construction defect,” the states and laws and trial courts have created a complex issue.”  She goes on to say, “Generally, this is because each state has its own approach to defining ’construction defect.’  Not only do approaches vary widely by state, but the individual state statutory schemes themselves can be ambiguous, and it can be left to the courts to determine the applicability of the definition of “construction defect” on a case-by-case basis.”1

Avoiding those complexities and averting unending legal debates on the subject, a more basic approach is adopted for the purposes of this paper.  Simply stated, a defect is a deficiency, and a deficiency means something essential is missing.  The essential missing element can take on many forms such as proper design criteria, recognition of soil conditions, quality workmanship, proper interface between products or processes, and quality materials. 

Oftentimes in construction jargon, the terms “defective” and “non-conforming” are used together.  While they are often related, there are differences that should be clearly understood.  Non-conformance means “not in accordance with” and generally is expressed in relation to the contract documents.  Defective, because something essential is missing, means that the item in question is not performing properly, or will not perform properly at some later point in time.

It is important to note that, while all defects are non-conforming, not all non-conformities are defective.  This distinction may become significant as a construction defect case makes it way through the legal system.  Something that is not in conformance with the contract documents may take a different legal path than a defective condition.  In other words, a breach of contract matter versus a tort matter.  However, there are consequences for both, and either may result in damages.

Take the case of a painting contractor who paints a house a color different than that specified in the contract.  The paint the contractor used was of good quality and it was applied properly, i.e., nothing essential was missing.  Therefore, based on the aforementioned definition, this is not a construction defect, but is more appropriately non-conforming workmanship and a breach of contract.
 
The Effect of Construction Defects

The term used commonly throughout the construction community to describe the effects of a construction defect is distress.  Distress basically means there is some type of physical or performance failure related to the defective condition.  The effect can either be actual damage that has already occurred or potential damage that is a progressively deteriorating occurrence where the impact has not manifested.

There is a direct correlation between distress caused by a construction defect and some measure of loss-of-use in the defective product or property.  This loss-of-use may be as extreme as total abandonment, either permanently or temporarily, or may result in reduced utility due to the real or potential degradation of performance that will progressively worsen.

Construction defects cause distress, but the effects of distress may not be the final effect.  Repairs may be necessary to correct the distress and cure the defect.  Distress, previously the effect caused by the defect, now becomes a cause itself, leading to repairs which are the final effect.

This two-tiered process is explained further by looking at how cause-and-effect relationships work. 

• A cause is something that makes something else to happen, i.e., the producer of the effect.  Of two related events, it is the one that happens first.

• An effect is something that happens due to the cause, i.e., the outcome of the cause.  Of two related events, it is the one that happens second or last, depending on the circumstance.

This concept of cause-and-effect relationships is essential to the allocation of damages by relating causation and responsibility.  This will be explained in greater detail later. 

Damages in a construction defect case are generally measured by the cost of repair, especially for residential property.  However, not all defects will be repaired.  If repairs are performed, the cost of repair is determined as the cost to return the defective product or property to its intended condition or use.  Alternative measures may be either the fair market value or the replacement cost of the property, depending on the particular circumstances.  When repairs are made under normal circumstances, no allowance is given for “betterment,” whereby the owner voluntarily chooses to improve the original condition or use.

Additionally, there is always the potential for latent defects that cannot be included because they are not yet known.  There may also be the consideration of “economic waste,” where the cost of repair far exceeds the value gained by the repair.  The owner may also decide not to repair and accept the risk of the defect or non-conformance.  Accordingly, an equitable adjustment may come through other means such as an adjustment to contract value or an additional reserve for future maintenance within the capital improvement planning process.

Depending on the circumstances of the case, there likely will be certain consequential costs that may be added to or subtracted from the damages aside from the cost of repairs.  As this is not an exercise in the calculation of damages, the focus will remain on how to allocate those damages once they are calculated.

The Need for Allocating Damages

The word allocation is the cost accounting equivalent of the legal term apportionment.  Both have the same meaning, that being “to divide and distribute according to a plan.”  Oftentimes there is a need to allocate a determined amount of damages arising from a construction defect because several parties participated in the action, or inaction, leading to the defective condition.  Likewise, need may arise as the result of a subrogation action filed on behalf of a third-party such as an insurance company.

In either of these cases the responsible parties might include design professionals, architects, construction managers, subcontractors, developers, or anyone else whom the plaintiff considers to have some liability. 

One example of this is seen when a homeowner is experiencing movement in the foundation due to expansive soils.  A forensic engineering evaluation has determined that the soils were expanding as a result of moisture from several sources including ground water not draining properly, improperly installed sprinkler system, incorrectly attached gutter downspouts, inadequately sloped grading away from the foundation, or the lack of evaporation because the house now covers the once-exposed soil.  This multi-faceted problem can implicate the general contractor, soils engineers, civil engineers, inspectors, and numerous subcontractors, each having some contribution to the defective condition.

A subrogation example is seen when a general building contractor is held liable for defective construction of homes that are experiencing mold growth and deterioration to structural members due to moisture.  The contractor’s insurance carrier has paid to settle the claim but seeks to recover its loss, through subrogation, from the individual subcontractors or the owner’s agents who participated in the defective work.

When multiple parties are involved, the need arises for determining the likely causes that contributed to the defective condition, assigning responsibility based on each party’s participation, and allocating the damages based on these findings.  The correct methodology to be used for this allocation is a detailed and systematic approach that thoroughly analyzes the data and forms conclusions based on sound cost engineering practices.

The alternative to this is a totally subjective approach lacking both support and credibility.  Sometimes, this subjectivity is nothing more than dividing the damages evenly among the number of parties involved or simply an attorney’s determination without expert consultation.  Unfortunately, these approaches are used far too often. 

Comparatively, the recommendations expressed herein may appear somewhat novel, but nonetheless are necessary to ensure continued advancement within the disciplines of cost engineering and claims analysis. 

Overview of the Allocation Process

A forensic analysis is used to determine causation and liability in order to allocate the resultant damages.  The analysis takes a retrospective look at all events that have transpired and studies those events for the purpose of making supportable decisions.  Those decisions are designed to be the logical consequences of assumptions.  The slang phrase commonly used to describe this process would be “peeling the onion back”, referring to removing one layer at a time. 
The cause-and-effect relationship is instrumental in the process as it directly links the related events to each other, one step at a time.  The analyst must be cautious, however, to avert a common misconception that this process is a root-cause analysis.  It is not.  Simply stated, a root cause analysis is conducted by asking the question “Why?” until there are no more questions to ask.  Therein lies the root of the problem.  The root cause of a construction defect may very well be the fact that a masonry contractor does not have sufficient resources to adequately train the labor force in proper construction methods.  This is all well and good, but it lends no added value to the analysis once the fact is established that the masonry contractor is responsible for the defect.  In other words, the analysis may, and oftentimes does, fall short of the true root cause of the problem and proceeding beyond a specific point is unnecessary.

Again, an effect is something that happens due to a cause, i.e. the outcome. In this context it may either be distress or repair, but either way it is the starting point of the analysis because it is the thing we presently know.  For example, if distress exists or repair is necessary then some fact such as physical evidence or engineering determination is available to verify that fact.  That is the known event and the first step in the analysis is to discover the cause, or oftentimes multiple causes, that are contributing factors. 

When there is more than one likely cause for distress and resultant repairs, the issue of multiplicity is compounded.  Not only are there multiple parties that require differentiation, but now there are multiple causes that must be considered at the same time in order to equitably allocate the damages. 

The first step in the analytical process is to review and order the likely causes leading to the defective condition.  A hierarchical rating must be established that ranks the causes according to their significance.

For example, consider the case that has evidence of distress to a building in the form of cracks in the stucco.  According to engineering analysis, it is determined that there are five possible causes leading to the cracks.  These likely causes are so varied that they involve the work of several subcontractors; the framer, the window installer, the painter, and the masonry applicator.  The framer installed the OSB sheathing, the window installer was responsible for flashings between the windows and stucco, the painter was responsible for caulking around the windows and doors, and the masonry applicator mixed and installed the stucco, all of which played a role in causing the cracks. 

The next step in the process is to assign responsibility based on participation of the parties involved.  In the stucco cracking case, the masonry subcontractor is aligned with the tasks performed on the job based on explicit contractual scope of work such as installing the lath, mixing the materials, and applying the stucco.

Once that step is completed, the linking is basically complete.  At this point, the responsible parties are linked to their scope and this scope is linked to the distress (effect) which is then linked to the defect (cause).  The last step in the process is to allocate the damages in a realistic and reasonable manner to the responsible parties.

Graphically, the process flow can be shown as in Figure 1 - Process Flow Diagram.

A more detailed graphic  (Figure 2 - Key Elements of the Model) shows how these key elements are further reduced to lower levels in order to begin the decision analysis necessary for proper allocation. 

Details of the Allocation Process

All cases are different and no one case experiences all the varying circumstances that may occur.  A look at several cases collectively and progressively is required to adequately address the major issues commonly faced by the analyst.

The methodology most often used to rank order the multiple causes of a defect is evident in the stucco cracking case referred to earlier.  As stated, it was determined that there were several likely causes leading to the cracks in the stucco and these must be ranked in order of their significance in contributing to the cracks.  In other words, if the work performed by one contractor is more likely to cause cracking, then this should bear more weight than the work of another contractor whose work was a minor contributor.

We have the ability to perceive relationships among the things we observe, to compare pairs of similar things against certain criteria, and to discriminate between both elements of a pair by judging the intensity of their preference for one over the other.2

We also have the capacity for a range of feeling and discrimination that permits us to develop relationships among the elements of a problem and to determine which elements have the greatest impact on the desired solution.3  

To determine the intensity of impact of the various elements, we must perform some type of measurement on a scale with units.  To measure priorities of impacts in order to solve problems, make decisions, or conduct comparisons, we compare one element with another. 

For example, suppose you are asked whether you prefer apple pie over cherry pie and the answer is “yes”.  The next question would be how much more do you like apple pie over cherry pie and the answer is “twice as much”.  Now we have some measurements to conduct quantitative comparisons, apple to cherry equals 2 times and the reciprocal is cherry to apple equals half as much.  Continuing the questioning allows apple to be compared to pecan and so forth until all alternatives have been considered.

In summary, this process incorporates judgments and personal values in a logical way.

Assume that the following five conditions were observed at the stucco-cracking project:

1. Shear Paneling-Areas that the oriented strand board (OSB) sheathing used as shear paneling was installed “butt-tight” with no gaps or openings between adjacent panels to accommodate the expected expansion and contraction movement.

2. Water Penetration-The stucco façade was not terminated/detailed at intersections to window frames, wood trim, and other miscellaneous substrate components in accordance with standard industry procedures or the stucco manufacturer’s installation reference manual. 

3. Improper Mixing of Materials and Admixtures-There was some evidence during the case presented that the materials were improperly mixed at certain times during construction.

4. Stucco Application Thickness-The white stucco finish coat applied over the single layer basecoat was of smooth trowel finish that did not appear to meet the minimum thickness requirements. Cracks in the base coat have telegraphed through the finish coat and provide a source for water entry into the wall.

5. Metal Lath Reinforcement-The woven metal wire lath that was being installed on the residences under construction was not installed in accordance with the requirements and installation procedures. The lath was not secured to each of the framing supports/studs as required.


To begin the questioning, weights are assigned to each likely cause on a scale from 1 to 9, with 1 being equal significance and 9 being extreme significance.  Asking the following two questions of each cause can simplify this:

• Is Cause A more or less significant than Cause B?

• How much more or less significant is Cause A compared to Cause B?

Once the values are determined for each pair of causes being considered, those values are inserted into Step 1 of Table 1.

The math is formulated such that the result gives the overall priority, or weighting, in rank order, for all likely causes being considered.  As can be seen in Step 2 of Table 1, the most likely cause leading to the stucco cracks for this particular case was the shear paneling and the others fall in order accordingly. 

Once this ranking is determined, the analyst can begin to make assignments based on the contractor who performed that particular work and the allocation of damages, in this case repairing the stucco, can be calculated. 
As cases become more complicated, the process requires more steps to cover the complexities.  Consider the case where, similar to the stucco cracks, multiple defective conditions (causes) led to water intrusion of a home and that water ultimately resulted in mold contamination.  There is a need now to allocate a second tier of damages to the responsible parties.  That tier represents the secondary effects of the defect and is not the “direct” result of a construction defect linked to a specific party.  The costs to repair these secondary items are referred to as associated costs.

Consider the case where initial construction work failed to install the required visqueen over the exposed soil in a crawl space, improperly installed the perimeter drain system to allow water extraction, and failed to provide proper clearances between the soil and structural components in the crawl space.  These defective conditions ultimately led to complete removal of the wood flooring system, re-excavation of the crawl space, and remediation of the mold. 

The contractor who failed to install the visqueen certainly has to pay for properly correcting that defective work, but must also share in all associated costs related to the direct repair of the defects assigned.
The portion of the associated costs allocated to each contractor is a function of both the weighted rankings as determined and frequency of the occurrence.  If the defect involved more than one individual property, frequency may become an issue.  If the defect was ranked as the most significant cause, but only occurred occasionally throughout the project, the frequency of occurrence most likely will influence the overall weightings.

This can be done by adding a step that factors the frequency of occurrence for each defect into the model.  A simple percentage that proportionately calculates the frequency of each defect can be used for this purpose.  This is shown as Step 3 on Table 1.

After the significance of the defect has been determined through the comparative weightings and its frequency of occurrence has been incorporated, the process must not proceed until responsibility has been clearly established.  The starting point is a review of the contract documents to ensure whether the work was within the contractor’s scope per the contract agreement.  Sometimes the contract documents are not clear and other contemporaneous documentation such as daily logs or invoices must be reviewed.  For example, the contract scope for a framing contractor may be simply stated as “Framing” with no itemized detail (this is certainly not recommended).  This brevity does not readily tell the analyst who installed the windows and additional research is required in order to segregate that specific task.

Even if the particular defective work is not in the contractor’s contractual scope, the contractor is not totally absolved of responsibility for that defect.  Participation must be considered as both active and passive.  Contractors have a certain level of duty to accept the conditions of a substrate before proceeding with their work.  The level of that duty may be influenced by contract language, whether the pre-existing condition was patent or latent, and the skill reasonably required to recognize that condition. 

Obviously a painting contractor would have both the opportunity and the skill to recognize that the paint cannot be applied to drywall that has not been taped.  Likewise, a concrete contractor should not proceed with pouring concrete on a patio that has a negative slope and will drain toward the house. 

Participation may also be aligned with parties not performing the construction work, but who may be responsible for design, management, inspection, and observation.  No regard is made as to whether these parties are joined with the owner or the contractor.  Fair is fair and all must share responsibility accordingly.  In determining the appropriate amount of the damages to be allocated to these parties, certain tests may be applied.  Among these tests are key questions such as:

• Did any party have the responsibility for observing the work, either as it was being performed or afterward, with the intent of approving and certifying the work?

• Was any party responsible for oversight and management of the work with authority to control the work and commensurate assumption of risk?

By thoroughly understanding each party’s involvement and responsibility, an appropriate allocation can be made based on the significance of those factors.  For example, if an engineer has the contractual responsibility for observing and “certifying” the contractor’s workmanship is correct, that responsibility carries a relatively significant duty.  The amount of this engineer’s allocation would be greater than an engineer with merely observation and advisory roles.

The yet unanswered question deals with the general contractor responsibilities in the overall construction process where defects occur.  It is generally assumed that the general contractor is initially 100 percent responsible to the owners for the repair costs based on his vicarious liability for the work of all subcontractors.  After settlement or payment by the general contractor, this assumption changes and an allocation of the relative responsibility to the other parties involved in the defective work is necessary.  This condition is the sole reason for development of the allocation model described herein.  The model now must incorporate an additional step that allocates a portion of the damages to the general contractor.

In determining the relative responsibility between the general contractor and the subcontractors performing the defective work, the original agreement between the parties themselves regarding responsibility and profit should be considered.  The subcontractor accepted the responsibility to complete the work in accordance with the applicable standard of care for payment of certain costs and a fee.  Likewise, the general contractor accepted the responsibility of supervision and oversight of the subcontractor’s work for payment of certain costs and a fee.  A general contractor should not expect to recover their fee percentage from a subcontractor who has performed defective work since they did not properly fulfill the necessary oversight role as required.    It is assumed that the general contractor’s fee is typically within a range from 7.0 percent to 15.0 percent for their supervisory role and this amount should be allocated accordingly.

Summary

All parties have been identified and their roles have been established.  The defects have been linked with the repair costs, both direct and associated, and any consequential costs have been added.  Alignments have been made between the defects and the responsible parties and the calculations are now straightforward.  Each step in the process has reduced the data down to the lowest common denominator reasonably available allowing for diligent consideration of the assumptions and clear decisions to be made.

The primary goal of the Allocation Model is to provide a systematic approach for properly relating causation to responsibility and liability of resultant damages.  This paper introduces the essential steps in the process that are required to develop an adequate allocation model.  Each case will have its own complexities that may require intermediate steps incorporated at strategic points along the way.  Although the model has that flexibility, the analyst must not lose focus of the overall concept and omit an important step.  The model requires all key elements defined in Figure 2 to be complete and provide reasonable allocations.  The model incorporates aspects from cost engineering, decision analysis, and basic mathematics disciplines, and integrates them into a structured process in order to provide logical consequences of assumptions.

© Copyright 2006 Professional Investigative Engineers. All rights reserved.

.................................................................................................................................................................
1Sparks, Marianne, “Construction Defect Resource Guide”, American Re-Insurance Company, San Francisco, CA, 1st Edition, 2005

2Saaty, Thomas L., “Decision Making for Leaders”, RWS Publications, Pittsburgh, PA, 3rd Edition, 1995

3Ibid