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The construction industry is becoming increasingly reliant on new electronic technology, ranging from project-specific Web sites and online equipment auctioning to bid analysis software and negotiation tools. Although the construction industry has been slow to warm up to the technology, 1/ usage is increasing every day. Surveys indicate that 80 percent of contractors and owners use Web-based communications, 25 percent purchase or sell products over the Internet and 17 percent bid for jobs online. 2/ Fifty-eight percent of owners report they have used a project management Web site. 3/

The Internet is not without its problems. Hidden behind the technology's promise of greater efficiency, accountability and speed are traditional issues of contract formation and enforcement, project relationships and assessment of liability. Plus, new technology raises new concerns about security, reliability and data integrity.

This article will address the major legal and practical concerns facing the construction industry as it embraces new technology, with emphasis on three major areas: online purchasing and sales; project management Web sites and extranets; and Web-based bidding tools. It will identify significant areas of concern and, when possible, suggest steps for diminishing potential problems and limiting liability.

Online Purchasing and Sales

The Internet is the world's largest marketplace, growing dramatically as more vendors and consumers go online everyday. For the construction industry, the Internet presents a novel opportunity to negotiate bulk prices with, purchase hard-to-find products from and sell surplus materials to a market that expands well beyond traditional regional boundaries. Ideally, the results are more opportunities for sellers and better selection and prices for consumers.

For those looking to buy or sell equipment and materials, the selection of Web sites is nearly endless, with varying choices and features. Many Web sites provide contractors with real-time access to the inventories of suppliers. 4/ Contractors can chose from a list of vendors, locate those with available supplies and negotiate price and delivery terms. Some sites provide users with access from their desktops to photographs and specifications from vendors across the country or around the globe. 5/ Other sites allow contractors to post requests for quotations and receive replies online. 6/ Overall, e-commerce promises the industry faster deliveries, cheaper prices, improved procurement tracking and more informed purchasing decisions.

Despite these prospects, the construction industry has been slow to adopt online purchasing and sales. In fact, a recent survey found only one-quarter of owners and contractors bought or sold via the Internet, with most, 61 percent, using it to purchase office supplies rather than buying or selling construction materials. 7/ However, as more dot-com companies target the construction industry, the numbers are certain to grow. One study predicts 11 percent, or $141 billion worth, of construction industry spending will be online by 2004. 8/

However, more online spending means more legal and practical concerns:

Contracting. Construction companies looking to purchase and sell online may find the Internet ideal in many ways for contracting. 9/ Online contracting actually eliminates some of the ambiguities and other problems inherent in conventional written agreements. For example, many businesses traditionally contracted with each other through the exchange of preprinted contracts. This exchange often resulted in a "battle of the forms," where the basic terms of the two contracts would be the same, but the boilerplate provisions covering such issues as warranties and dispute resolution would be different. If a dispute arose under the contract, it often was difficult to ascertain which contract terms controlled. Many e-commerce sites eliminate this problem by setting up standard forms through which all contracting must take place. The terms are set -- the other party cannot change provisions and then claim those are the terms of the contract. Sites that feature controls requiring the seller or purchaser to "click" his or her acceptance of terms also help preclude such ambiguity. This specific consent mechanism minimizes concerns over whether the parties were made aware of the provisions of the contract.

Sometimes online contracts are formed via e-mail communications rather than through standard forms on Web sites. In these cases, the parties commonly agree upon the basic terms of the contract, such as product information and price, without mentioning other provisions normally found in boilerplate language. Such terms often can be implied from past dealings or from the Uniform Commercial Code. However, this still may leave issues open to interpretation and debate. A company can avoid this problem by adopting a trading partner agreement that establishes the terms for all transactions with the other party. Such agreements are becoming increasingly common and can be drafted to apply to both electronic and hard copy contracts. Such agreements are particularly useful in the Internet marketplace because they can speed up contracting and delivery.

Despite its benefits, online contracting is a relatively new venture that may pose risks, particularly in the area of jurisdiction and enforcement. Because the Internet marketplace is global, e-commerce participants potentially are subjecting themselves to the laws of distant states and countries. A simple solution is to use forum selection and choice of law provisions in online contracts. However, there is no guarantee that a court always will enforce such language. As an enforcement safeguard, a party should take steps to ensure that the other party knows of and understands the impacts of such provisions when entering the contract. As always, a buyer must read the contract and understand that, because of forum selection provisions, enforcing an online deal may require greater legal and travel costs than handling a dispute with a regional vendor.

Under the Uniform Commercial Code and related state laws, a contract for the sale of goods of $500 or more must be in writing, which raises concerns about the validity of such transactions over the Internet. However, a recently enacted federal law eliminates this uncertainty as to the validity of online contracts. On June 30, President Clinton signed the Electronic Signatures in Global and National Commerce Act ("E-SIGN"), which gives electronic contracts the same legal effect as hard copy forms. 10/ E-SIGN does not change existing law governing rights or obligations under contracts; it simply provides for the legitimacy and enforcement of contracts in electronic form. In other words, a contract cannot be denied validity just because it was created online or signed electronically.

The new federal law applies to any contract for the sale of goods or lease of personal property under Articles 2 and 2a of the Uniform Commercial Code, which covers most e-commerce transactions. However, the law does not affect other documents, such as court papers, wills, family law documents, utility service cancellations, eviction or foreclosure notices, health and life insurance cancellations, certain health and safety notifications, and contracts under other provisions of the Uniform Commercial Code. 11/

E-SIGN brings other changes as well. 12/ The new law pre-empts inconsistent state laws or laws that are not technology-neutral. For example, a state law no longer can require that parties enter an electronic contract by using a certain application or technology. Also, the law establishes certain procedures for consumer transactions. When written notices are required by federal or state law, consumers must be able to choose whether electronic communications will suffice and to demonstrate their ability to access the electronic information. Consumers also must be told how to obtain hard copies of electronic records and contracts. Finally, if a law requires retention of contracts or records, E-SIGN permits the maintenance of such documentation in electronic format.

As a result, the construction industry will feel the effects of E-SIGN in areas beyond e-commerce. For example, the new law allows for the retention of records in electronic form, eliminating the need for hard copies of documents and paving the way for a truly electronic workplace and project site. In contrast, companies using e-mail to communicate and negotiate deals need to be aware that an e-mail message easily may be interpreted as an offer that, under the new law, can result in a binding contract. A court will look at the communications to determine whether a contract was formed applying the classic test of offer, acceptance and consideration. If such factors are present, there is a contract. Thus, as always, employees must be careful to maintain proper business etiquette and to clearly convey intentions when communicating by e-mail. Careless or inadvertent words traveling on the Internet may be more binding or carry more consequences than those traveling by mouth. Nevertheless, the true impacts of E-SIGN are yet to be seen, and companies will have to wait to see how the courts interpret the law's provisions before understanding its full impact.

Antitrust Issues. E-commerce participants should keep in mind that business-to-business ("B2B") Web sites have sparked government scrutiny because of antitrust concerns. 13/ Industry-driven marketplaces are fertile ground for collusion and price fixing. The federal government worries that B2B exchanges provide opportunities for suppliers to float trial balloons to signal each other about price increases, for competitors to band together to keep down costs of supplies, and for industry players to exclude smaller companies and possibly drive them out of business. The B2B sites also are hosts to huge amounts of data that companies can use to instantaneously track sales and coordinate pricing strategies "without ever speaking to each other about it." 14/ The Federal Trade Commission still is unsure how to address new technology issues, but companies should consult with antitrust lawyers before setting up or buying into exchanges to avoid potential pitfalls.

Practical Concerns. For buyers, there are many practical concerns. Staleness is a significant problem with Web-based information. Product specifications may not be as comprehensive or up-to-date as the latest printed version, 15/ but a buyer may not know this unless he or she does the necessary homework. Furthermore, information usually is not provided in a standard format, so comparing products and Web sites can be a difficult and time-consuming process. 16/ The lack of a standard catalog of SKU numbers for the industry defeats the ease and efficiency of estimating systems that pull data from online databases. 17/

Purchasing used equipment online brings up issues of buyer confidence and seller guarantees. Many Web sites that specialize in used equipment sales and auctions have "dispute mechanisms" in place to handle differences between buyers and sellers. 18/ This may include reserving final determination of equipment condition, appointing third-party inspectors and adopting an authorized certification program. However, having dealers certify equipment raises other questions of whether a certification opinion is trustworthy or informative and whether a dealer is able to conduct a worthwhile inspection outside his or her brand specialty. 19/ These are issues that arise in all used equipment transactions, but where the parties are spread across the country, a common e-commerce scenario, these problems become more complex, costly and time-consuming. The parties should anticipate these problems before entering into a contract. The available dispute mechanisms should be investigated and analyzed -- will they help or protect you in case of a dispute? -- before a buyer or seller decides to deal in used equipment online.

If problems with a purchase do arise, the buyer's likely recourse will be the traditional route -- against the seller. Web sites that are conduits for used equipment sales usually post explicit terms and conditions absolving them of liability for sales gone bad or user misconduct, and some reserve authority to call off a sale if a party is suspected of wrongdoing. 20/ Thus, while the Internet may change where and how construction companies do business, it does not change the adage of buyer beware.

Project Web Sites and Extranets

Project-specific Web sites and extranets may present the biggest change to how construction companies conduct day-to-day business. These systems promise reduced paper consumption, lower costs, improved communications, quicker turnaround on requests and timely (or even early) project completion. 21/ Such technology is a natural for the country's building industry, where Federal Express deliveries cost more than $500 million annually, where mistakes frequently result from use of outdated drawings and where projects may involve hundreds of players spread out over a large geographic region. 22/

Many companies have been using computerized systems for years to manage and schedule projects. However, today's project Web sites and extranets claim to provide more opportunities for consistent document review, multi-party collaboration and expanded communications, both on the site and in the office. 23/ For example, companies can post drawings and documents on the system so everyone can easily access and share the latest changes and additions. With many programs (known as interactive collaboration), users can mark up documents online without changing the original drawings, allowing for resolution of design and engineering conflicts in the field without expensive and cumbersome CAD software. Other online applications are more complex, combining the interactive collaboration features with a workflow tracker that posts and records communications and other documents between architects, engineers, contractors and subcontractors. These systems provide for lightening-quick (compared to traditional methods) responses to requests for information and change orders, streamlining the field process, thwarting disputes and speeding up the project. Furthermore, the Web site or extranet becomes a common depository for communications, creating an accurate and comprehensive virtual paper trail for the project.

Some applications operate exclusively through an in-house server that runs the system and stores the data. These systems are accessible only by parties within company. To allow remote access to the system, the company must add on Web-enabling software and a Web server. Other applications run entirely offsite via application service providers ("ASP"). ASPs house and maintain the system, so all users must use the Internet to access it.

The Web-based systems generally are available as either Web sites or extranets. 24/ A Web site is a public venue where parties can post and view documents and, with optional software, add privacy features and storage capacity, track document revisions and host private discussions. A single Webmaster controls the content. An extranet has these same features but with added security, making it off-limits to the public. An extranet either can be a private area of a public Web site or a portion of an internal "intranet" accessible by outside members. Also, any member with the proper access and password can post documents and alter content, not just a Webmaster. In this section, "Web site" generally refers to both types of systems, but it is important to remember there are differences between the two.

Many vendors extol project Web sites as the answer to the litigatious construction industry. Because these systems create a record of all requests, orders, submittals and other communications during a project, the Web sites supposedly create a greater sense of accountability and ward off disputes. However, before project Web sites are embraced as a solution for all of the industry's problems, there are several significant legal and practical concerns to keep in mind.

Data Ownership and Archiving. Because the Web sites create a record of the entire project, actual ownership and control of the data is of considerable importance. Many software vendors stress the need for their clients to clarify ownership of documents and drawings with all parties involved with the project before initiating a project. 25/ These issues should be handled contractually before the project begins.

What happens to the system after the project is completed is largely up to the party that initiates the Web site. 26/ Some owners keep the Web site operational after project completion as a segue into facilities management. However, the owner or the general contractor usually archives the entire record on CD-ROM. Again, the parties should agree contractually before the project begins on who should get copies of the record and what information should be included or excluded from each party's version.

Archiving the record on CD-ROM brings up special concerns of future accessibility. For example, in California, the statute of limitations for latent construction defects is 10 years. 27/ By the time a suit is brought or discovery begins, the technology for accessing the information on the CD-ROM no longer may be readily available. Imagine today trying to access material on a 5¼-inch floppy disk, in Wang format, or on a Beta videotape. Keeping a record of a project is useless if it is unreadable, so companies must take steps to ensure the continued availability of project information.

System Reliability. Whether a system is kept on- or off-site, companies must be aware of potential reliability problems that could disrupt or stop a project. If the Internet connection goes down, remote users or even all users, if housed off-site, can become disconnected and unable to work online. If equipment is kept onsite, data can become corrupted or irretrievable because of pollutants, dust and dirt. In-house systems also may suffer from too many users or poor technological infrastructure, causing crashes in the system and stalling a project for hours or even days. Data can be lost if the system is not backed up or is improperly housed.

In many ways, off-site systems present fewer issues of reliability. Most hosted products are serviced with much more dependable technology than in-house operations. The physical security of the system is better as well because many providers house systems in highly secured buildings with heightened protection against fires and earthquakes. Plus, most providers automatically back up data daily, easing concerns about lost information.

However, other reliability concerns may arise with off-site systems. A service provider or Web host no longer may be able to adequately take care of a company's needs or could even go out of business, leaving a company caught in the middle of a project. With hundreds of new ventures competing for the industry's attention, companies need to be aware of the financial backing and technical capabilities of an ASP or software provider before entering into an agreement for service or products. Beware especially of free offers or beta tests without learning more about the background of the provider. Although it may cost more, companies may want to stick to providers with major pieces of the market or at least an established presence. With so many new ventures flooding the marketplace, not everyone will be able to survive the long haul.

If a project Web site or extranet does go down, a company's recourse may be limited. A company possibly can seek relief from the software provider or ASP, but read the service contract or licensing agreement carefully. Many contracts significantly limit the liability of providers for damages that can be awarded for such problems. Also, such a course of action is viable only if the provider has funds to pay damages -- something to think about before contracting with an upstart ASP. If the source of the problem is an Internet connection or otherwise Web-related, the company may try to seek relief from its Internet service provider ("ISP"). However, most ISPs explicitly state in their service contracts that they are not responsible for delays or system failures beyond their control. Thus, a company may not be able to pursue this route when seeking damages or compensation for losses due to an Internet breakdown.

A company looking to its insurance policy's property damage or business interruption coverage for help with a computer-related loss may face problems as well. 28/ Many insurance companies may not consider damage to data, information or program functions as damage or loss to the insured's property and, therefore, may not extend coverage to such incidents. Furthermore, a company that is using an off-site system may face more problems if the damage to the data or programming took place off-site -- this may not be considered the insured's property. Similarly, business interruption coverage usually only provides compensation for loss due to damage or loss to the insured's property, so the same problems arise. In the end, a company should review its policies carefully and expect to battle with its insurance carrier if it decides to seek relief through this route. Or, consider getting a separate policy designed specifically to cover Internet-related incidents.

Most importantly, a company should expect its project Web site to go down or perform inadequately at some point during the project and have a contingency plan in place before it happens. All parties participating in the site should be aware of and be expected to conform to the contingency procedures to mitigate possible work stoppages and other problems. By having contingency measures in place before the project begins, companies hopefully can avoid the courthouse in the end.

Security. Possibly the most significant concern general contractors have with project Web sites is the safekeeping and confidentiality of the information posted. A company may worry about the value of computer equipment if stolen or damaged, but it is the data stored on the computer that is of the most consequence. 29/ Information kept both on- and off-site are susceptible to user misuse and "spying."

To alleviate concerns about the security of confidential data, most Web sites are designed so parties have limited access to information, depending up the level and type of job. For example, a subcontractor may only have access to drawings and communications relating to its part of a project while other information may be shared with all parties involved. A general contractor may use the Web site to perform budget analysis and communicate with its employees regarding costs, information that it may not want the owner or subcontractors to access. Accordingly, project Web sites must have a strong security system to limit access and prevent breaches.

Passwords are the most common security device and are extremely susceptible to breaches. Too many users adopt common passwords, making it easy for an infiltrator to break into the system or access restricted information. Do not use names, birthdates, company names, phone numbers or other identifiable personal attributes. And, definitely never use "password."

Many off-site systems also feature encryption mechanisms so information transmitted between parties cannot be read if intercepted. However, companies should plan for security issues in advance and have procedures for handling breaches. If information is extremely confidential, companies should consider not using a Web site or extranet for its dissemination -- especially if system users are among those that would benefit most from clandestine access to it.

Project Web sites and extranets also are susceptible to outside computer viruses and hacker attacks, which can slow down operations, tie up applications or even destroy data. 30/ Traditional antivirus programs can prevent some infections, but such programs may not detect some of the new tactics being used. For example, someone could send a "Trojan horse" as an e-mail attachment or Internet download to a company employee. The Trojan Horse allows an outside computer to take temporary control of the company's system, flood it with data and cut off communication in and out of the network. Such an attack usually is not detectable with the traditional antivirus software although there are other programs on the market that search out and destroy such intruders. A firewall is a good mechanism for preventing communication and data passage from unknown, and possibly dangerous, sources from penetrating a company's private system.

Other Concerns. Allowing users to access and post information raises concerns about whether documents can be improperly or unwittingly changed by parties. Already, companies have witnessed accusations fly between engineers, architects, contractors and subcontractors that drawings and documents are being changed to hide mistakes or place blame on others for mishaps. The system administrator, the party who identifies and provides the access levels and revision rights to the users, is the gatekeeper and must delegate responsibility wisely. The system administrator also must use its authority conscientiously and take steadfast steps to earn the trust and confidence of the other users on the system. Once the system administrator uses its power to cover its tracks or others' mistakes -- even for a seemingly innocent or relatively benign reason -- it always will be susceptible to allegations of impropriety.

If a legal dispute arises because of alleged changes or omissions in electronically published documents and drawings, the system itself may play a major role in the ultimate outcome of the issue. As already noted, many project Web sites and extranets keep a comprehensive record of project documents and communications, including the tracking of changes to the data. Even if not obvious from the public interface of a system, the application may be able to pinpoint when documents are changed and by whom. Such information likely is discoverable in a legal proceeding. As a result, while the project Web site may present the opportunity for the system administrator or other parties to hide mistakes and place blame on others, the Web site may be equally capable of uncovering the culprits. However, do not rely entirely on the system to sniff out improprieties -- tampering is not always noticeable, and new technology still needs to be developed to assist evidence-gathering in this area. 31/

Another major practical concern is price. According to one consultant, project Web sites that track workflow start at $25 a user or $260 a project, with additional costs for data storage, server maintenance, Internet connections and bandwidth, and equipment upgrades. 32/ Many contractors are "renting" the systems on a per-project basis -- to the tune of $1,250 to $1,500 a project -- so they can work the application price into the project costs and invite an unlimited number of parties to participate. 33/ Others purchase the software outright, but this can be considerably more expensive, starting at $30,000 to $89,000, depending on the operating system. Systems that feature only interactive collaboration -- document posting and access -- are available for less or even for free although such sites generally have limited storage capacities and do not produce the comprehensive record of communication as the project workflow applications. 34/

Having adequate technology infrastructure is crucial to the effectiveness of the systems. The software for most of these applications is extremely powerful and will crash older computers with inadequate processing speeds and memory capacities. When using systems that require an Internet connection, rather than just an in-house network, companies are strongly encouraged to upgrade to a DSL line or better to ensure rapid transmission of information. A dial-up modem will not suffice when transmitting large documents and drawings.

Also, project-specific Web sites only perform at their fullest capacity if the team is committed to using it and using it properly. Some subcontractors have declined to use the applications, making it necessary for contractors to employ dual systems of electronic and hard copy communications and data. 35/ This duplicative process may significantly undermine the effectiveness of the technology. Proper training also is important. Employees need to understand how to use the software and what the parties expect from the system. Users must learn to identify and alert others to important items and to include all necessary information in communications. 36/

Web-Based Bidding Tools

More and more, companies and governments are looking to the Internet and related electronic avenues to streamline bidding and procurement practices. Many entities now use online means for posting solicitations for bids on contracts and for receiving proposals. In fact, many solicitations and accompanying materials are available only in electronic forms, including some of those issued by the federal government. 37/

For parties putting projects and requests out for bid, the world of e-commerce promises many advantages over traditional methods of procurement, such as real-time posting of requests and amendments, efficient dissemination of materials and lower costs. 38/ The Internet also makes it easier for contractors to obtain estimates and quotations from suppliers. If a contractor needs to obtain multiple estimates for a major purchase, he or she can go to e-commerce sites and often get numbers fast and anonymously. 39/ Or, he or she can issue requests for quotations or invitations to bid and receive responses online. 40/ Bidders, too, may reap the benefits of the Internet by obtaining RFP information more quickly and in easier-to-use formats. Often drawings and specifications are sent electronically, allowing bidders to receive information instantly. Bid analysis applications also help parties on both sides formulate quotations and analyze proposals, again saving time and money.

There is a flip side to the advantages offered by Web-based bidding tools. Two common worries about the Internet -- reliability and security -- particularly vex online bidding and procurement systems. Many contractors shy away from fully utilizing online bidding applications because of uncertainty over whether proprietary and time-sensitive information will safely reach the proper party. They may research and receive bid solicitations online, but many contractors will not transmit proposals or quotations by the same media. 41/

These fears have some validity. Bids can disappear in cyberspace, leaving a company with few options for relief. For example, in Matter of American Material Handling, Inc., 42/ the U.S. Comptroller General denied the protest of a government contractor whose electronic bid to the Air Force was lost because of a computer malfunction. The Air Force issued its solicitation for a boom lift through the Federal Acquisition Computer Network (FACNET), an electronic procurement system that transmits information through a government gateway, then to privately run value-added networks (VANs). VANs provide government procurement information to companies registered to do business with the federal government. American Material submitted its bid electronically to its VAN, which transmitted it to the federal government through FACNET. The VAN confirmed the transmission of the quote by issuing the company a hard copy record. However, the Air Force's computer that receives the quotations malfunctioned and lost all of the bids received the day American Material submitted its bid. To remedy this problem, the Air Force re-posted the request for bids on FACNET and extended the deadline date. It also attempted to post a notice to all previous bidders to resubmit quotations lost due to the malfunction, but the notice mistakenly was not transmitted over FACNET. American Material did not resubmit its bid, contending it was unaware that its quotation was lost. When the contract was awarded to a company that submitted a higher quotation, American Material protested, asserting it was "unfairly penalized for the computer failure." The Comptroller General disagreed, noting "as a practical matter, even with appropriate procedures in place, an agency may lose or misplace a bid or quotation, and the occasional loss of a bid or quotation -- even if through the negligence of the agency -- generally does not entitle the bidder or vendor to relief." 43/

However, government contractors are not entirely at the mercy of the federal government's computers. If the company can show the loss of the bid was part of a "systemic failure" by the federal agency to adequately receive and safeguard the quotes, then a protest may be sustained. 44/ The loss cannot be an isolated incident, as in Material Handling. Instead, it must "involve… more than mere occasional negligent loss of a quotation" and point to an unreasonable breakdown in procedure by the agency. This is high burden to meet for government contractors to meet, so it is best to anticipate problems and confirm receipt of electronic bids.

Security of the information also is a major concern. "Contractor executives talk about zealous procurement officials disseminating contract awardees or short lists before individual winners are notified or of proprietary information inadvertently posted." 45/ Many agencies are trying to battle this lack of confidence by using encryption technology for Internet transactions. 46/ Federal regulations also require agencies using e-commerce to "ensure that the agency systems are capable of ensuring authentication and confidentiality commensurate with the risk and magnitude of the harm from loss, misuse, or unauthorized access to or modification of the information." 47/

To comply with this requirement, agencies are looking to public key infrastructure ("PKI"), which establishes a process for third-party verification of online identities and for dual decoding of digital signatures by both parties engaging in the contract. 48/ Nevertheless, contractors need to ensure such steps are being taken when transmitting confidential information via the Internet, especially when dealing with private parties. These requirements are for the federal government only and are not applicable to private transactions. As a result, it may be up to the contractor to impose restrictions and security mechanisms on the other party before engaging in online bidding. Security concerns will remain, but these steps are significant in protecting online bidding process.

Contractors also need to take precautions to protect any data submitted to the government or private parties with copyright or restricted rights notices. 49/ Under federal regulations, the federal government takes no responsibility "for the disclosure, use, or reproduction of such data." 50/ As result, a company may lose its exclusive use of the data unless appropriate steps are taken when submitting information, either by them or by their subcontractors. 51/

Contractors also may encounter problems on their own end, particularly when relying on bidding applications. In M.A. Mortenson Co., Inc., v. Timberline Software Corp., 52/ the Washington Supreme Court ruled that a license agreement containing language that limited the liability of a software company prevented a contractor from receiving consequential damages due to a "bug" in the application. Mortenson purchased the bidding software from Timberline, which had been providing the general contractor with software for a number of years. When the software was shipped to the company, each package bore a printed license agreement that limited Timberline's liability to the license fee paid by the purchaser. Mortenson used the software to prepare a successful bid on a construction project. It later discovered that a bug in the software allegedly resulted in an underbid of about $2 million. Timberline knew about the software problem, but considered it too obscure to affect performance.

The court ruled the license agreement on the package governed the dispute and limited the liability of Timberline despite any other agreement between the parties. The court determined that the limitation provision of a "shrink-wrap license" became part of the original agreement between the parties, and "Mortenson's use of the software constituted its assent to the agreement, including the license terms." 53/ Again, the lesson here is to read the contract and understand the risks before entering the contract or using the product. As much as bidding software or project-specific applications will streamline operations and lower costs, the risks are there, and companies must enter the e-commerce world with open eyes.

Conclusion

The Internet is changing the construction industry. Companies are contracting by e-mail, surfing the Net for supplies and equipment, and looking online to complete projects faster and cheaper. The pace is slow -- construction ranks 87th globally among industries in adopting technology 54/ -- but steady, as companies approach the move differently. Some blindly race online and others embrace it more timidly. Regardless of the approach, all companies should keep in mind a few pointers to reduce the risks and ease the transition:

1. Don't forget the old rules. While the Internet may make doing business faster, easier and even cheaper, it does not change the old precautions -- read the contract, understand the risks and buyer beware.

2. Anticipate problems. Even the best technology will fail sometimes, and companies must plan for this by including liability provisions in contracts, establishing contingency plans for project participants and requiring security precautions in online transactions.

3. Invest in good infrastructure and training. Project Web sites and extranets can streamline an operation, but only if a company has the technology and employee knowledge base to use it.

As the industry moves online, unforeseen legal and practical issues undoubtedly will emerge, not to mention the concerns that will accompany the significant cultural and behavioral changes the Internet will bring to the industry. However, companies that understand and anticipate the risks of e-commerce will thrive in this new environment and become leaders of the revolution.

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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.

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ENDNOTES

1/ Steve Woodward, Portland, Ore., Firm Leaps into Web-Based Commercial Construction Management, The Portland Oregonian, August 14, 2000 [noting that the construction industry tied with the manufacturing, mining, agriculture and forestry sectors for having "the nation's lowest percentage of users of the Internet for purchasing and sales"].

2/ Web Creeping into Owners' Operations, Engineering News-Record, May 1, 2000, at 27.

3/ Id.

4/ Joe Stoddard, E-Commerce Boom or Bust?, Construction Business Computing, November 1999, at 15.

5/ Matthew Phair et al., Portal Providers Propose Changes for Equipment Buyers and Sellers, Engineering News-Record, June 5, 2000, at 28.

6/ Thomas Hernandez Jr., E-Commerce and A/E/C, Building Design and Construction, June 2000.

7/ Web Creeping into Owners' Operations, Engineering News-Record, May 1, 2000, at 27. A survey conducted by the Construction Industry Manufacturer's Association and the Associated General Contractors came up with similar numbers, with only 28 percent of those surveyed using the Internet for material procurement. Matthew Phair, Technology Issues Are High on Manufacturers' Agenda, Engineering News-Record, December 6, 1999, at 33. However, 61 percent of respondents said they used the Internet to purchase airline tickets. Id.

8/ Bob Tedeschi, Construction Heads into the Internet Age, New York Times, February 21, 2000, at C1.

9/ For more information on contracting on the Internet, see Karl D. Belgum, Legal Issues in Contracting on the Internet, June 1999,
<www.constructionweblinks.com/Resources/
Industry_Reports_Newsletters/june_1999.html>.

10/ Electronic Signatures in Global and National Commerce Act, Pub. L. 106-229, 114 Stat. 464 (2000),
< frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=106_cong_public_
laws&docid=f:publ229.106>
For more information on the new federal law, see President Signs Electronic Signature Act to Facilitate E-Commerce, July 17, 2000, <www.costructionweblinks.com/
Resources/Industry_Reports__Newsletters/
July 17, 2000/e_signature.htm>.

11/ Electronic Signatures in Global and National Commerce Act, §103.

12/ Id. §101.

13/ David Leonhardt, Business Links on Web Raise Antitrust Issues, Wall Street Journal, July 7, 2000, at 1.

14/ Id.

15/ Matthew Phair et al., Portal Providers Propose Changes for Equipment Buyers and Sellers, Engineering News-Record, June 5, 2000, at 28.

16/ Id.

17/ Joe Stoddard, E-Commerce Boom or Bust?, Construction Business Computing, November 1999, at 15.

18/ Matthew Phair et al., Portal Providers Propose Changes for Equipment Buyers and Sellers, Engineering News-Record, June 5, 2000, at 28.

19/ Id.

20/ Richard Korman, E-Terms and Conditions: "We Want to Be Switzerland," Engineering News-Record, June 5, 2000, at 34.

21/ Some reports say project Web sites and extranets can shave up to 30 percent off a project's costs. Georgie Raik-Allen, Merger Reinforces Construction E-Commerce, Red Herring, January 20, 2000.

22/ John Bodrozic, Meridian Project Systems, online project management, collaboration and e-business, address at the Center for Integrated Facility Engineering Conference on E-Commerce and E-Business in Design and Construction: Getting Started and Staying in Business, April 8, 2000.

23/ Paul Levin, Web-Based Project Controls, Construction Claims Monthly, July 2000.

24/ Geoffrey Moore Langdon and Arnie Williams, A Trend to Be Reckoned With -- AEC Project Webs, Cadence, February 2000,
<www.cadenceweb.com/2000/0200/issuefocus0200.html >.

25/ Id.

26/ Id.

27/ California Code of Civil Procedure §337.15.

28/ For more information on insurance risks and the Internet, see Internet Poses New Insurance Challenges and Concerns, May 22, 2000,
<www.constructionweblinks.com/Resources/
Industry_Reports__Newsletters/
May_22_2000/5_22_00_Insurance_Risks.htm>.

29/ Chad Jones, How Thin Client/Server Platform Solved One California Contractor's Computing Woes, Construction Business Computing, December 1998, at 1.

30/ The Eve of Destruction, 3 Constructech, No. 2, 2000.

31/ Matthew Phair et al., Buying and Selling Go On Line, Engineering News-Record, October 27, 1997, at 26.

32/ Paul Levin, Web-Based Project Controls, Construction Claims Monthly, July 2000.

33/ Geoffrey Moore Langdon and Arnie Williams, A Trend to Be Reckoned With -- AEC Project Webs, Cadence, February 2000.

34/ Paul Levin, Web-Based Project Controls, Construction Claims Monthly, July 2000.

35/ Bob Tedeschi, Construction Heads into the Internet Age, N.Y. Times, February 21, 2000, at C1.

36/ Project-Specific Web Sites, Constructor, December 1998, at 72.

37/ Matter of NuWestern Constructors, Inc., Comp. Gen. No. B-275514 (Feb. 27, 1997) [ruling that decision by the Army of Corps of Engineers to issue a bid solicitation for a design-build contract exclusively in CD-ROM format did not unfairly discriminate against small companies or otherwise restrain competition].

38/ Matthew Phair et al., Buying and Selling Go On Line, Engineering News-Record, October 27, 1997, at 26.

39/ Matthew Phair et al., Portal Providers Propose Changes for Equipment Buyers and Sellers, Engineering News-Record, June 5, 2000, at 28.

40/ Thomas Hernandez, Jr., E-Commerce and A/E/C, Building Design and Construction, June 2000.

41/ Matthew Phair et al., Buying and Selling Go On Line, Engineering News-Record, October 27, 1997, at 26.

42/ Matter of American Material Handling, Inc., Comp. Gen. No. B-281556 (Feb. 24, 1999).

43/ Id.

44/ Matter of S.D.M. Supply, Inc., Comp. Gen. No. B-271492 (June 26, 1996).

45/ Matthew Phair et al., Buying and Selling Go On Line, Engineering News-Record, October 27, 1997, at 26.

46/ Id.

47/ 48 Code of Federal Regulations §4.502 (c).

48/ Rand L. Allen et al., E-Contracting in the USA, Agency Purchases Are Increasingly Paperless Transactions, Legal Times, February 28, 2000, at 34.

49/ Id.

50/ 48 Code of Federal Regulations §52.227-14 (f).

51/ Rand L. Allen et al., E-Contracting in the USA, Agency Purchases Are Increasingly Paperless Transactions, Legal Times, February 28, 2000, at 34.

52/ M.A. Mortenson Co., Inc., v. Timberline Software Corp., 140 Wn.2d 568, 998 P.2d 305 (2000).

53/ Id.

54/ David B. Rosenbaum and Judy Schriener, Company Cultures Viewed as Threat to Web Collaboration, Engineering News-Record, May 15, 2000, at 19.


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