managing the risk in cmar contracts: guidance for owners,...

Managing the Risk in CMAR Contracts:

Guidance for Owners, Contractors and SubsNegotiating and Drafting Risk Allocation Provisions, Interplay With Other Contract Terms

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WEDNESDAY, MARCH 20, 2019

Presenting a live 90-minute webinar with interactive Q&A

James P. Bobotek, Partner, Pillsbury Winthrop Shaw Pittman, Washington, D.C.

Mario R. Nicholas, Attorney, Stoel Rives, Portland, Ore.

Mary A. Salamone, Partner, Atkinson Andelson Loya Ruud & Romo, Irvine, Calif.

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Managing the Risk in CMAR Contracts: Guidance for Owners,

Contractors and Subs

James P. Bobotek

[email protected]

Mario R. Nicholas

[email protected]

Mary A. Salamone

[email protected]

Overview of Construction Manager at Risk

Parties

“At Risk”➢ CM must deliver project on

time➢ CM must deliver project

within budget

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CMAR CM Agency

Overview of Construction Manager at RiskDifferent than CM Agency

Owner

Architect

Engineer

Engineer

Engineer

CM as Contractor

Subcontractor

Subcontractor

Subcontractor

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ConstructionManager

Owner

Architect

Engineer

Engineer

Engineer

Subcontractor

Subcontractor

Subcontractor

Overview of Construction Manager at RiskCharacteristics

➢ Two contracts both held by Owner (Architect & Contractor)

➢ CMAR selected based on qualifications and fee (e.g., OH&P, preconstruction services, and fixed amount for general conditions)

➢ In design phase, CM acts as agent of Owner — may even assist Owner in selection of A/E firm

➢ CM performs preconstruction services such as value engineering, cost estimating, schedule review, constructability reviews, coordination drawings, specification reviews, material availability issues, etc.

➢ Need for collaborative team work between designer and CMAR during design phase

➢ As design nears completion, construction contract executed for specific scope and price

➢ Thereafter, CM assumes risk for delivering project on time and within budget similar to a general contractor

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Project Definition

Design Construction Startup

Sequence of Work

Selection of CMAR

GMP Development

CMAR hires Subcontractorsor self-performs

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Project Definition


Sequence of Work: Comparison with Design-Bid-Build

Owner Hires Architect

Bidding and AwardConstruction Price Established

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CMAR Design-Build

Overview of Construction Manager at RiskComparison with Other Delivery Methods

Owner

Architect

Engineer

Engineer

Engineer

CM as Contractor

Subcontractor

Subcontractor

Subcontractor

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Project Definition


Sequence of Work: Comparison with Design-Build

Selection of Design-BuilderGMP Established

Design-Builder HiresSubcontractors

Design-Builder Designs Projector Hires Architect

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➢ Selection based on qualifications & experience rather than lowest bid –arguably better quality construction

➢ CMAR, architect, and owner all collaborate which creates enhanced synergies throughout process

➢ Owner retains control of design➢ Construction costs known and fixed at time of award➢ Some risks transferred to CMAR➢ Option to fast track by phasing bid packages➢ GMP allows for cost transparency and ability to audit – tends to build trust

and diminish adversarial relationships➢ Minimizes RFIs and change orders➢ Streamlines the submittal process➢ Relies on relevant expertise, pricing, and availability of

materials/construction methods➢ CM holds all subcontracts and assumes responsibility for their

performance

Advantages

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➢ Owner may still be at risk for exclusions and inconsistencies in contract documents

➢ Perception that price competition is limited

➢ Problems can arise from staff turnover and personality conflicts

➢ Design changes during construction are costly

➢ Owner must process multiple pay applications for trades each month

➢ Contractor must bid on unknowns, potentially leading to changes - contingencies can reduce risk

➢ Better suited for larger scale projects

➢ CMAR not authorized for some public agencies

Disadvantages

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Public entities expressly authorized to use CMAR:

• City of San Diego (Pub. Con. Code §20175)

• Irrigation districts, county water districts or “other similar water districts by law” but only for surface storage projects (Pub. Con. Code §20928.1)

• Counties and County-Affiliated Entities (Pub. Con. Code §20146)

Note:

➢ Charter Cities

➢ Regents of the University of California (Article IX of CA Constitution grants virtually exclusive authority over its affairs)

➢ Caltrans (CM/GC)

CMAR Authority in California

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Prior Law• Counties could use CMAR for the erection, construction, alteration, repair,

or improvement of any building owned or leased by the County• Subject to certain restrictions, including requirement that project exceeds

$1 million

SB 914 (effective January 1, 2019)

• Expands CMAR authority to include public entities with governing boards comprised of members of a County’s Board of Supervisors (“County-Affiliated Entities”)

• Authorizes Counties and County-Affiliated Entities to utilize CMAR for the erection, construction, alteration, repair, or improvement of any infrastructure they own or lease, excluding roads

• CMAR authority still restricted to projects in excess of $1 million • CMAR contracts may be awarded on either a low bid or best value basis

Expansion of CMAR Authority in California

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• Implied warranty of design accuracy in traditional project delivery

• Hybrid project delivery – Exclusive control of design is not vested in Owner and A/E team potentially giving rise to liability under Spearin Doctrine

• CMAR provides design consultation but Owner is not obligated to accept suggestions

Evolving project delivery methods with limited judicial guidance

Effect on Spearin Doctrine

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Coghlin Electrical Contractors, Inc. v. Gilbane Building Co., 472 Mass. 549 (2015)

Facts:• Public owner hired architect to design new psychiatric

hospital

• When design was partially completed, Owner hired Gilbane as CMAR

• Gilbane entered into an electrical subcontract with Coghlin

• Coghlin sued Gilbane to recover additional costs in part arising from design errors

• Gilbane filed a third party complaint for indemnity against Owner on electrical subcontractor’s claim


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Facts:

• Coghlin alleged ceilings were designed to leave two feet of space between ceiling and bottom of structural steel but design required five feet of mechanical and electrical work in that area

• After weeks of attempting to resolve discrepancy, Coghlin was directed to place electrical work as high as possible in the ceiling and issue would be addressed later


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Holding:• Does Spearin apply in the context of CMAR delivery?

• Massachusetts Supreme Judicial Court held that Spearin can apply to CMAR

• Court found that the differences between responsibilities of a general contractor in DBB and CMAR affect the scope of the implied warranty

• CMAR may benefit from implied warranty only when CMAR “acted in good faith reliance on the design and acted reasonably in light of [its] own design responsibilities.”


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Holding:

• Whether CMAR’s reliance was reasonable may be impacted by level of participation in the design phase and extent to which the contract delegates design responsibility to CMAR


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Holding:

• Next question the Court decided was whether contract language expressly disclaimed CMAR’s right to rely on design specifications

• Contract delegated to CMAR extensive responsibilities to “carefully study” all design documents, to take field measurements and verify field conditions, discover and report errors and omissions, and review design for clarity, consistency, and constructability


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Holding:

• Court concluded that none of these provisions constituted an “express abrogation of the implied warranty”

• Court relied on language in contract stating that recommendations and advice of CMAR concerning design modifications and alternatives were subject to review and approval of Owner and Designer thereby maintaining control over design


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Takeaway:• Although CMAR is not responsible for design aspects unique

to design professionals’ obligations, CMAR may be responsible for design issues that should reasonably have been identified as part of its preconstruction services

• Contractors can still use protection of Spearin outside of DBB

• Application of Spearin depends on Owner’s level of control over design

• New forms of alternate project delivery with fewer judicial opinions as legal guidance

• Clear contract terms create clarity in absence of judicial interpretation


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Risk Factors

• Owner

– More certainty in pricing because the CMAR and its subcontractors are involved in the feasibility, constructability, design and value engineering processes

– Less risk at time of contracting because GMP not yet agreed on and easy to limit exposure by predetermined “Preconstruction Fee”

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Risk Factors

• Owner

– Many aspects of project risk execution are passed to the CMAR, reducing the Owner's potential overall risks

– Earlier commencement of work; some trades can start before CDs are complete

– Less risk of CMAR claims for design errors

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Risk Factors

• Owner

From the Owner’s perspective, this militates against including a large contingency in the GMP prior to inclusion of buy-out savings

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Risk Factors

• CMAR

– More knowledge of the project, budget and design goals = more pricing certainty

– Higher expectancy from Owner that design will be free from errors, ambiguities, and inconsistencies

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Risk Factors

• CMAR

– More design review responsibilities, making it more difficult to clearly insulate from design liability

• Requires professional liability insurance

• Creates more insurance risk

– “Spearin Doctrine” concerns

– Cost overruns

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Risk Factors

• CMAR

Example of additional contract language:

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Risk Factors

• CMAR

Example of additional contract language:

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If CMAR encounters previously unknown conditions at the Project site

. . . Notwithstanding the foregoing, no adjustment in the Guaranteed

Maximum Price or Contract Time shall be allowed to the extent that . .

. an experienced contractor who has constructed many similar projects

could reasonably have discovered those conditions by performing a

reasonable investigation or as part of the Preconstruction Phase

Services performed on this Project.

Risk Factors

• CMAR

Why?

Loss leader for . . . the “job”

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Risk Factors

• Design Professionals

– “Team” with contractor

• Greater communication

• Fewer change orders

• Fewer submittals and RFIs

• Requires more transparency

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Risk Factors


– Better cost feedback during the design process

– More time for the contractor to thoroughly grasp the scope and details of the project

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Risk Factors


– General contractor chosen primarily on qualifications, secondarily on price

– Faster transition from design documents to start of construction

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Risk Allocation Provisions

Some key terms to consider when drafting CMAR contracts:

• GMP

• Contingency

• Allowances

• Sharing

• Key Personnel and Staffing

• Termination

• Insurance

Key Terms

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“The Construction Manager will provide the Owner with a Guaranteed Maximum Price proposal for the entire scope of the Project when the Drawings and Specifications are at least 90% complete or at such other time agreed to by Owner and Construction Manager. The Guaranteed Maximum Price proposal will be provided in writing with all back-up line item costs attached supporting the proposed Guaranteed Maximum Price. The Guaranteed Maximum Price proposal shall be reviewed by the Owner and the Architect. The proposed Guaranteed Maximum Price shall include all fees and percentages as well as the estimated costs for all services required to complete the Project in accordance with the Contract Documents.”

Comment: Tie the GMP to a percentage milestone for completion of the design documents

When to Enter into the GMP? (1/2)

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“To the extent that the Drawings and Specifications are anticipated to require further development by the Architect, the Construction Manager shall provide in the Guaranteed Maximum Price for such further development consistent with the Contract Documents and reasonably inferable therefrom. Such further development does not include such things as changes in scope, systems, kinds and quality of materials, finishes or equipment, all of which, if required, shall be incorporated by Change Order.”

Comment: CMAR must remember that the Architect controls the design, and if changes are made for “further development” after it enters into the GMP, it will be hard pressed to increase the GMP

Comment: If GMP entered into earlier, higher probability that there will be “changes in scope,” and not simply “further development” of the design

When to Enter into the GMP? (2/2)

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“The Guaranteed Maximum Price includes $_____________ for Construction Manager’s Contingency. Construction Manager and Owner agree that the use of Construction Manager’s Contingency is strictly limited as follows: Construction Manager’s Contingency may not be used without the prior written approval Owner. Construction Manager’s Contingency may be used, if it otherwise would be reimbursable as a Cost of the Work, (1) for additional costs necessary to coordinate or complete the Work that was inadequately described or provided for in the Contract Documents, (2) for any work that Construction Manager should have included, but inadvertently failed to include, in its estimate, whether through direct estimating or in obtaining pricing from subcontractors, (3) for re-work not caused by Construction Manager’s or any Subcontractor’s negligence and not recoverable by insurance, and (4) for actual costs that may be incurred by Construction Manager to replace a Subcontractor who, during the course of construction, becomes bankrupt or financially insolvent and is no longer able to provide services to the Project. Construction Manager’s Contingency may not be used for scope changes or upgrades in quality. A request to use the Construction Manager’s Contingency shall be submitted to Owner in a form reasonably acceptable to Owner. Any unused Construction Manager’s Contingency shall be returned to Owner through a credit against the Guaranteed Maximum Price.”

Contingency

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“In preparing the Construction Manager’s Guaranteed Maximum Price proposal, the Construction Manager shall include an agreed-upon amount for contingency for the Construction Manager’s use with Owner’s prior written approval to cover those costs considered reimbursable as the Cost of the Work but not included in a Change Order. In no event shall Construction Manager’s contingency exceed _______ percent (__%) of the estimated Cost of the Work.”

Comment: Be aware of “implicit” contingency

Comment: The further along the GMP, the lower the contingency

Interplay of GMP and Contingency

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“Unless otherwise provided in the Contract Documents, allowances shall cover:

.1 the cost to the Contractor of materials and equipment delivered at the site and all required taxes, less applicable trade discounts; and

.2 Contractor’s costs for unloading and handling at the site, labor, installation costs, supervision not included in supervision and management line items of the initial schedule of values, and other direct expenses contemplated for stated allowance items.

Whenever such costs for allowance items are more than or less than allowances, the Guaranteed Maximum Price shall be adjusted accordingly by Change Order executed by both parties before any excess costs are incurred.”

Comment: Consider deleting “overhead,” “profit,” and “other expenses” (often included by AIA, ConsensusDocs, etc.) from scope of allowances

Allowances

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Option 1 (No Sharing): “In the event the sum of the final Contract Sum shall be less than the final Guaranteed Maximum Price, the savings shall devolve one hundred percent (100%) to the Owner. In the event of any such savings, upon the making of final payment, the Guaranteed Maximum Price shall be deemed reduced by the amount of any difference between the Guaranteed Maximum Price and the Cost of the Work plus the Construction Manager’s Fee so that the final amount of the Guaranteed Maximum Price is equal to the Cost of the Work plus the Construction Manager’s Fee as of the date of such final payment.”

Comment: We view this as the “default” option for our owner clients, but…

Sharing – Is Sharing Caring? (1/2)

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Option 2 (Sharing as Incentive): “In the event the sum of the final Contract Sum shall be less than the final Guaranteed Maximum Price, the savings shall devolve seventy-five percent (75%) to the Owner and twenty-five percent (25%) to the Construction Manager; provided, however, that if the building for the Project is Substantially Complete, including receipt of the certificate of occupancy, by _____________, 20__, the savings shall be re-adjusted to devolve fifty percent (50%) to the Owner and fifty percent (50%) to the Construction Manager. In no event shall the savings that devolve to the Construction Manager exceed _______ percent (__%) of the Guaranteed Maximum Price.”

Comment: Consider sharing the savings to provide an incentive to the CMAR

Comment: To avoid the CMAR inflating the GMP to produce “savings,” cap the maximum savings available to the CMAR at some % of the GMP

Sharing – Is Sharing Caring? (2/2)

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“The Construction Manager’s Representative shall not be replaced without the consent of the Owner. If the Owner approves replacement of the Construction Manager’s Representative, the Owner shall have the right to approve the replacement Construction Manager’s Representative. The Owner shall have the right, which shall be exercised in a reasonable fashion, to require replacement of the Construction Manager’s Representative.”

Comment: Consider whether to include similar provision regarding other key personnel in addition to the CMAR’s Representative, especially if critical for preconstruction phase of the work

Key Personnel and Staffing

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“Prior to the execution of the Guaranteed Maximum Price Amendment, the Owner may terminate this Agreement upon not less than seven days’ written notice to the Construction Manager for cause or for the Owner’s convenience and without cause, and the Construction Manager may terminate this Agreement, upon not less than seven days’ written notice to the Owner, for the reasons set forth in Section __ of the General Conditions. The amount of time allotted for negotiating the GMP Amendment and the timing of any termination shall be determined in the Owner’s sole discretion.”

Comment: Owner should aim for maximum flexibility to terminate prior to agreeing to the terms of the GMP

Interplay of GMP and Termination (1/3)

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“Prior to the execution of the Guaranteed Maximum Price Amendment, (i) the Owner may terminate this Agreement upon not less than seven days’ written notice to the Construction Manager for cause or for the Owner’s convenience and without cause; provided, however, that the Owner shall not provide such seven days’ written notice of termination unless it has first made a good-faith effort to agree to the terms of the Guaranteed Maximum Price Amendment, including without limitation by scheduling and conducting at least two meetings between the Owner’s Representative and the Construction Manager’s Representative to review the terms of the Guaranteed Maximum Price Amendment; and (ii) the Construction Manager may terminate this Agreement, upon not less than seven days’ written notice to the Owner, for the reasons set forth in Section ___ of the General Conditions.”

Comment: CMAR should aim for some time period of mandatory negotiation of the GMP prior to allowing the Owner to terminate


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“If the Owner terminates the Contract pursuant to Section __ after the commencement of the Construction Phase but prior to the execution of the Guaranteed Maximum Price Amendment, the Owner shall pay to the Construction Manager an amount calculated as follows, which amount shall be in addition to any compensation paid to the Construction Manager under Section __:

.1 Take the Cost of the Work incurred by the Construction Manager to the date of termination;

.2 Add the Construction Manager’s Fee computed upon the Cost of the Work to the date of termination at the rate stated in Section __ or, if the Construction Manager’s Fee is stated as a fixed sum in that Section, an amount that bears the same ratio to that fixed-sum Fee as the Cost of the Work at the time of termination bears to a reasonable estimate of the probable Cost of the Work upon its completion; and

.3 Subtract the aggregate of previous payments made by the Owner for Construction Phase services.

In no event shall the Owner be obligated to pay the Construction Manager for overhead or profit on unperformed Work, or damages as a result of such termination.”


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• CMAR should consider obtaining professional liability insurance because of its role in design development and construction management

• Construction management services may be professional services that are not covered by typical CGL policy

• Field modifications provide another significant professional liability exposure for a CMAR since it is responsible for approving plan and design changes during the construction process.

• CMAR should ensure lower-tier design-build subs (e.g., MEP contractor) carry their own professional liability insurance

Contractor’s Professional Liability Insurance

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