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Specifying Practices—Permits and Construction Documents

By Kevin O'Beirne, PE, FCSI, CCS, CCCA, CDT posted 06-21-2022 05:35 PM

  

In our bureaucratic society, it sometimes seems that one needs a government permit to do almost anything. Few activities require as many permits as a construction project. Governmental entities (municipal, county, state, federal), owners of utilities and transportation facilities, selected extra-governmental commissions, and possibly others may have jurisdiction over the project’s design, construction, and operation. Permits are required to build, perform earth moving, extend or connect to utilities, cut into or connect to roadways, draw resources (water, fuel, or minerals) from the environment, discharge water or exhaust gasses into the environment, occupy and use the facility, and more. The list can seem intimidating.

With all that red tape, what’s a design professional to do when developing the construction documents? Who obtains and pays for permits? Who is responsible for complying with permits? Should permits obtained by the owner be included in the construction documents and, if so, how, and where?

Permits are separate from the contractor’s obligation to comply with laws, statutes, ordinances, codes, rules, regulations, and lawful orders of governmental authorities having jurisdiction, which is addressed in a prior post on this blog; see “Specifying Practices: Laws and Regulations in Construction Documents”. Nonetheless, each entity that obtained a required permit (“the permittee”) is obligated to comply with the permit’s requirements. Failure to do so may have significant legal and regulatory ramifications. From the standpoint of construction contract administration, complying with required permits has gravity and importance equivalent to complying with laws and regulations.

Permits related to a capital project can be divided into two categories: those obtained by the project owner, and those obtained by the contractor. Each type will affect the construction documents.

 

Permits Obtained by the Contractor

Construction contracts typically allocate to the contractor responsibility for obtaining, paying for, and complying with permits required to perform the construction, such as municipal building, electrical, plumbing, and HVAC construction permits, permits for working in rights-of-way such as railroads and public roadways, and others. Standard construction contracts in widespread used in the United States address this, as discussed below.

Hand-in-hand with requirements for contractor-obtained permits are the contractor’s obligation to obtain and maintain licenses required for the work, often administered at the municipal level. Many municipalities issue licenses to electricians, plumbers, and HVAC contractors, as a means of ensuring a basic level of quality and safety for essential building systems. Often, such licenses are addressed in the same provisions as contractor-obtained permits.

The American Institute of Architects (AIA) Document A201—2017, Standard General Conditions of the Contract for Construction, includes:  

“§ 3.7.1 Unless otherwise provided in the Contract Documents, the Contractor shall secure and pay for the building permit as well as for other permits, fees, licenses, and inspections by government agencies necessary for proper execution and completion of the Work that are customarily secured after execution of the Contract and legally required at the time bids are received or negotiations concluded.”

When the project will include multiple prime contractors, AIA A503—2017/2019, Guide to Supplementary Conditions, appropriately advises the drafter of the project’s supplementary conditions to clearly indicate the respective contractors’ responsibilities for obtaining permits.

The Engineers Joint Contract Documents Committee (EJCDC) Document C-700, Standard General Conditions of the Construction Contract, addresses permits as follows:

“7.09     Permits

“A.  Unless otherwise provided in the Contract Documents, Contractor shall obtain and pay for all construction permits, licenses, and certificates of occupancy. Owner shall assist Contractor, when necessary, in obtaining such permits and licenses. Contractor shall pay all governmental charges and inspection fees necessary for the prosecution of the Work which are applicable at the time of the submission of Contractor’s Bid (or when Contractor became bound under a negotiated contract). Owner shall pay all charges of utility owners for connections for providing permanent service to the Work.”


EJCDC C-800—2018, Supplementary Conditions for Construction Contracts, does not address permits and construction licenses.

While AIA A201 and EJCDC C-700 have certain differences relative to permit obligations, their provisions on permits and construction licenses are similar.

In general, it is unclear whether the construction documents must present detailed requirements for contractor-obtained permits. On one hand, contractors experienced with similar work in the same jurisdiction as the project are familiar with requirements to obtain routine permits, such as building permits and right-of-way work permits. However, it may be appropriate to list in the contract documents the required permits and, where necessary, present more-detailed requirements for obtaining them when the required permits are either not obvious or when bidders and the contractor might otherwise reasonably be expected to be unfamiliar with them. Of course, if the required permits are listed in the contract documents, it will likely be necessary for the drafter of such provisions to clearly understand all the needed permits, including their issuing entity, as well as costs, procedures, and timing to obtain them.

Additional, contractual requirements concerning contractor-obtained permits, when necessary, can be included in either the supplementary conditions or the Division 01 specifications. For the latter, CSI MasterFormat—2020 allocates Section 01 41 26 – Permit Requirements.

When the project includes multiple prime construction contracts, the general contractor is typically responsible for obtaining the building permit. When municipal fees for obtaining the building permit are determined based on the total construction cost of all trades and prime contracts, to prepare their bid or proposal, the general contractor will either need to blindly guess at the probable contract price for each of the other prime contracts, or will need special contractual provisions, such as a stipulated cash allowance amount for the building permit fee. Fees for other municipal permits, such as electrical, plumbing, and HVAC, are often based on the cost of the associated prime contract and, hence, usually do not require a separate, stipulated cash allowance.

In addition to permits and licenses, municipal laws and regulations may also address local requirements for apprenticeship programs and other labor-related matters. Regardless of whether they are expressly addressed in the construction documents, such as in a Section 01 41 26 – Permit Requirements, the design professional and construction manager as advisor (CMa), if any, should be aware of such requirements.

For work on railroad property, in public roadways, utility easements, and the like, owners of the various properties and facilities that require work permits should be indicated in Section 01 14 33 – Work in Rights-of-Way (assigned in MasterFormat), to ensure the contractor, project owner, design professional, and others all understand which right-of-way owners have jurisdiction.

For the owner-hired construction contract administrator (i.e., the design professional or CMa) to track compliance with contractual requirements for contractor-obtained permits and licenses, it is appropriate for the contract documents to require that the contractor furnish, as “informational submittals”, a copy of each contractor-obtained permit and license.  Such requirements may be indicated in Section 01 41 26 – Permit Requirements. The owner obviously has an interest in ensuring its project has all required contractor-obtained permits and licenses.    

 

Owner-Obtained Permits

Certain permits needed for a capital project, such as a permit to construct and use facilities on land owned by a third-party (whether via a permanent easement or an occupancy permit), preconstruction approval to initiate construction (necessary for many infrastructure projects), and permits on which the owner and contractor will be co-permittees (in several states, the owner and contractor are to be co-permittees on National Pollution Discharge Elimination System (NPDES) permits for storm water discharges associated with construction activity, typically required by a state environmental agency, when one or more acres of ground cover will be disturbed during construction; in other states, the project’s storm water permit is obtained by the contractor), and others. In some jurisdictions, local permits for erosion and sediment control may be issued by a municipality or a county-level soil conservation district and may require that the project owner and contractor be co-permittees.

Owner-obtained permits are a more-complex matter for drafters of construction documents than contractor-obtained permits. For owner-obtained permits, the construction documents should clearly indicate, at a location where bidders and the contractor would most likely expect to find them, information such as:

  • Type and name of the permit.
  • Issuing entity.
  • Whether or not the contractor must be a co-permittee with the owner and, if so, how such status is secured and, upon project completion, terminated.
  • The duration the permit remains in effect.
  • Permit requirements with which the contractor must comply.

The latter item, immediately above, is perhaps the thorniest matter. Many design professionals preparing construction documents for projects that include owner-obtained permits elect to simply bind each permit, in its entirety, into the construction documents and include a blanket requirement for the contractor to comply with “all requirements of the permit.” However, there are at least two substantial drawbacks to this approach.

The first drawback is the voluminous nature of many owner-obtained permits, which can include dozens of pages. Construction stage obligations under such permits are often sprinkled throughout the permit’s fine print, interspersed with the project owner’s (i.e., the permittee) obligations that the contractor cannot, and often should not, fulfill. During the frantic, final weeks of the project’s bidding or procurement stage, it may be unwise to make bidders “hunt” for contractual obligations that will affect cost and time of performance amidst dozens of pages of legalistic bureaucratese. Instead, it may be advisable for the design professional, who may have assisted the owner in obtaining such permits in the first place, to cull out the pertinent requirements and include them at appropriate locations in the proposed contract documents. In addition to being much easier for bidders and the contractor, such an approach will also likely be helpful to the owner, design professional, and construction manager as advisor (if any) in enforcing the contractor’s compliance with the permit.

The second drawback is where and how to include in the contract documents owner-obtained permits. The most-common practice observed by this writer is including the permit as an “appendix” to the project manual. The problem with this is that the status of “appendices” as part of the contract documents is often unclear. Most projects’ construction documents for which this writer has performed quality control reviews, where owner-obtained permits were bound in “appendices”, failed to expressly indicate that appendices were part of the contract documents. Such a failure has potential for the permit requirements to be unenforceable on the contractor.

When an owner-obtained permit must be included in the contract documents, if it is in an “appendix”, the appendix should be clearly and explicitly indicated in the listing of what comprises the contract documents, in the owner-contractor agreement. For more on this topic, see “Avoiding a Contractual Fatal Flaw: What Constitutes the Construction Contract Documents?”, in the April 2017 issue of Construction Specifier magazine.

Alternatively, the permit can be bound as an attachment to its associated specifications section, in which case a final, “Attachments” article (in accordance with CSI SectionFormat—2007) should be included to clearly indicate that the permit is part of the specifications section. The number of pages in the permit should be clearly indicated. Regardless of how and where the permit is included, an appropriate specifications section should also include clear indication that the contractor is required to comply with the specific permit.     

Despite the foregoing, it is appropriate and perhaps necessary to include in the contract documents permits, in their entirety, on which the contractor will be a co-permittee with the owner, such as, in certain jurisdictions, NPDES permits for storm water discharges associated with construction activity. Such permits should optimally be included as attachments to the associated specifications section. For such permits, this writer has often developed a separate specifications section for each such permit, often numbered adjacent to the MasterFormat-assigned “01 41 26 – Permit Requirements”, such as “01 41 27 – Storm Water Pollution Prevention Plan and Permit”.  While such requirements could, of course, be included in “01 41 26 – Permit Requirements”, the typical page count for a section setting forth administrative and procedural requirements for permits for storm water discharges associated with construction activity appears to warrant a separate section.

 

The Risk of Jumping the Gun

If the contractor proceeds with the work before securing one or more required permits or licenses the contractor was required to obtain, the contractor will be responsible for the associated cost, time, legal, and other impacts, whether imposed by the owner or the authority having jurisdiction.  

Embarking on the project’s bidding or procurement stage and construction before all necessary owner-obtained permits and approvals are in hand significantly increases the owner’s risk.

First is the cost of complying with a permit for which requirements are unknown at the time the contract is priced. Unless the contract has a provision (discussed below) by which the owner retains the cost-based risk, the bidder or proposer will likely include in their bid or price proposal a contingency to cover such costs. For stipulated price work (lump sum and unit prices), the amount of such contingencies is typically unknown to the owner and design professional, and is paid by the owner regardless of whether the entire, assumed cost is incurred.

Alternatively, an owner-controlled contingency allowance may be included in the contract to mitigate large, hidden contractor contingencies in stipulated prices. However, among the  standard construction contracts in widespread use in the United States, model language for owner-controlled contingency allowances is included only in EJCDC’s documents, such as EJCDC C-700—2018 Paragraph 13.02 (“Allowances”). Regardless of the form of Division 00 documents used, appropriate language can be incorporated into a project’s specifications Section 01 21 00 – Allowances, which is assigned in CSI MasterFormat.

Complying with a permit where the permit’s requirements are unknown at the time bids or price proposals were submitted may also have an associated time impact. It may be appropriate to indicate in the contract documents a reasonable, assumed date by which the permit will be secured and, possibly, an assumed time impact to be incorporated into the construction progress schedule.

The final alternative for handling costs associated with complying with delayed owner-obtained permits is to omit the obligation from the initial contract documents and address the matter via a change order when the permit is secured. However, this alternative will likely be unappealing to many owners, especially public owners.

The second drawback of starting construction before all owner-obtained permits are in hand concerns work suspensions. If the authority having jurisdiction becomes aware that work is proceeding without the necessary permit, the owner may be subject to civil fines and penalties and, possibly, a court-ordered shutdown of the work. To avoid this, it may be necessary for the owner to order the contractor to suspend all, or part of, the work.

Widely used standard contract documents, such as AIA A201 and EJCDC C-700, include provisions allowing the owner to order the work suspended for up to a specified duration, often 90 to 180 days. However, because such a suspension is a delay within the owner’s control (see: “Delays in Construction—A Common Source of Claims”, on this blog), the contractor will likely be due both an increase in the contract price (for extra costs incurred due to the delay) as well as an extension of the contract times.

In the event the contractor is delayed by the owner’s failure to obtain a required permit, or other cause beyond the contractor’s control, the contractor will need to prepare and submit a change proposal or claim properly documenting the relief sought; see, “Claims Preparation: Claims Should be Clear, Complete, and Documented”, on this blog. The entity determining entitlement in such situations should be reasonable, as discussed in, “Partisan Professionals: Contractors Deserve Ethical Treatment”.

Should the work be suspended for more than the contractually allowed time limit, the contractor may be entitled to terminate for cause. While contractors rarely exercise such rights, the potential for such an outcome should not be dismissed or taken lightly.

 

Conclusions

Because permits and licenses needed for capital projects may be obtained by either the owner or the contractor, appropriate contractual provisions are necessary. General provisions concerning contractor-obtained permits and licenses are typically in the general conditions and may be further augmented in the Division 01 specifications. Where owner-obtained permits are necessary, the design professional should carefully consider how to include in the construction contract the necessary requirements to ensure the contractor’s compliance with owner-obtained permits and approvals.

 

Copyright 2022 by Kevin O’Beirne

The content of this blog post is by the author alone and should not be attributed to any other individual or entity.

The author of this blog post is not an attorney and nothing in this blog post constitutes legal advice. Readers in need of legal advice should consult with a qualified, experienced attorney.

 

Kevin O’Beirne, PE, FCSI, CCS, CCCA is a professional engineer licensed in NY and PA with over 30 years of experience designing and constructing water and wastewater infrastructure for public and private clients.  He is the engineering specifications manager for a global engineering and architecture design firm.  He is a member of various CSI national committees and is the certification chair of CSI’s Buffalo-Western New York Chapter.  He is an ACEC voting delegate in the Engineers Joint Contract Documents Committee (EJCDC) and lives and works in the Buffalo NY area.  Kevin O’Beirne’s LinkedIn page

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