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New Frontiers: Undertaking Construction Management
By Steven G.M. Stein, Esq. and Marc E. Odier, Esq.


I. INTRODUCTION

The ever-competing considerations of time, cost and quality in the fields of design and construction are giving rise to expanded opportunities for design professionals to serve as Construction Managers. While the genesis of construction management dates back to the mid-1960's,1 the 1990's will inevitably be viewed as the period when construction management emerged as a frequent alternative to the traditional owner/design professional/contractor model of project delivery. Construction management differs from the traditional process by adding another party to the historical three-pronged model and is attractive to many owners because of the increased quality it allows by placing the owner's consultant (the Construction Manager) in control of the trade contractors, purchasing and scheduling.

In its basic form, construction management is defined as the process by which a qualified third party provides construction leadership with a defined scope throughout various phases of a project (e.g. planning, design and construction), a Construction Manager represents the interests of the owner by administering the construction contract and managing the work, including the cost, time and quality aspects of the project. In its purest form construction management is performed by an independent party as a separate professional service, generally on a fee basis. In some instances, however, the architect or engineer will serve as Construction Manager in addition to providing design services.2

Construction management is generally undertaken with the use of separate prime contractors, with the Construction Manager performing the management and coordination functions typically carried out by the general contractor. The services of the Construction Manager during the design phase may, in some instances, substitute for services that would otherwise be performed by the architect or engineer (such as cost estimating), or may be broader than those of the traditional design professional (such as analyses of construction feasibility).

II. Role Definition for the Construction Manager

Construction management can essentially take one of two forms, each with its own scope of responsibilities and attendant risks and rewards. The two models are Pure "Agency" Construction Management and "At Risk" Construction Management.

Under this model of construction management, the owner contracts separately with the Construction Manager, design professional and either a general contractor or (more frequently) various prime contractors. The Construction Manager has administrative relationships with the architect/engineer and general contractor or prime contractors, but a contractual relationship only with the owner. The Construction Manager is generally not responsible for the means or methods of construction and does not guarantee construction cost, time or quality aspects of the work.

III. Why Would a Design Professional Be Interested in Serving as Construction Manager?

Perhaps the most self-evident reason for undertaking construction management services is the opportunity for increased fees on a given project. The increased scope of services (and the attendant increased risks) obviously leads to increased compensation, whether the design professional serves as a Pure "Agency" Construction Manager or an "At Risk" Construction Manager.

In addition to pecuniary considerations architects and engineers are also frequently motivated to serve as Construction Managers by a desire to provide the client with a better overall product. This objective is furthered through the Construction Manager's involvement in virtually all aspects of the design and construction. Particularly when dealing with an unsophisticated owner, the design professional's service as Construction Manager can significantly enhance the client's interests and prevent or minimize potentially serious cost overruns, schedule delays and quality concerns that might otherwise develop.

IV. Developing the Construction Management Fee

A. General Considerations

As with any contract a design professional enters, particular attention should be given to the fee structure for the provision of construction management services. Various fee arrangements are possible, including the basic/additional services fee structure commonly used when providing pure design services. Also available is a cost-plus-incentive compensation structure, pursuant to which the Construction Manager performs services on an hourly basis (along with defined reimburseables), with a not-to-exceed cost spelled out in the contract. The cost-plus-incentive also has a built-in incentive/penalty element which is tied to the overall project cost. Yet another fee structure is the cost-plus-award fee which allows the Construction Manager and key employees to receive premium compensation for exceptional efforts made toward recognition of the owner's project objectives.

Regardless of which fee structure is agreed to, the Construction Manager should make every effort to see that the Owner/Construction Manager Agreement contains a clear and completely defined scope of services.

B. Guaranteed Maximum Price

Irrespective of whether the Pure "Agency" or "At Risk" model of Construction Management is utilized, owners will often be interested in fixing a Guaranteed Maximum Price ("GMP") in the Owner/Construction Manager Agreement. Defined simply, the GMP is the maximum price the owner will pay for the scope of work defined in the Owner/Construction Manager Agreement. The owner typically will pay the actual costs incurred by the Construction Manager, plus a fee which has as its upper limit the GMP.

The use of a GMP can obviously have serious implications for the Construction Manager and care should be taken to consider the "unforeseens" and "what ifs" before agreeing to forever cap the construction management fee.

Particularly for design professionals who have never "construction managed" a project before, avoiding use of GMP might be advisable. The more experienced the design professional becomes in understanding the variables inherent in construction management, the greater ability the Construction Manager will have to evaluate and properly value the numerous potentialities that, if not properly factored into the calculation of the GMP, can seriously erode or even overcome the Construction Manager's profit margin.

V. Allocation of Risk

Part and parcel of developing an appropriate construction management fee and the appropriate scope of services is the consideration of risk allocation -- in other words, who will bear the risk and responsibility for uncertain future conditions or events. If these risks and responsibilities are to be borne by the Construction Manager, then appropriate consideration must be given to the dollar amounts necessary to warrant the assumption of such risks and responsibilities. The analysis of the various risks and responsibilities will obviously be different in many respects depending upon whether the design professional is serving as a Pure "Agency" Construction Manager or an "At Risk" Construction Manager.

VI. Considerations Affecting the Selection and Management of Contractor(s)

Certainly when the Construction Manager contracts directly with the trade contractor ("At Risk"), and even when the owner is the party contracting with the contractor(s) (Pure "Agency"), the Construction Manager must be qualified and prepared to select (or at least counsel the owner regarding the selection of) one or more appropriate contractors. In keeping with the partnering concept which is central to effective construction management, the owner and Construction Manager should, whenever possible, handle the contractor selection process as a joint effort.

Ideally, the Construction Manager will be able to work with the client to prequalify firms (if permitted),5 issue bid packages, receive and review bids, discuss scope of work, the schedule management plan and all bidding requirements with the most responsive bidders and award the contract (or contracts) to the contractor (or contractors) who offer(s) the best value. Including even the most unsophisticated owner in each aspect of the contractor selection process will allow the Construction Manager a greater understanding of the owner's needs and desires and will generally result in fewer client complaints as the project moves forward.

Construction Managers who are "At Risk" and thereby have a direct contractual relationship with the contractor will have direct payment obligations vis-a-vis the contractors. As such, it is incumbent upon the Construction Manager to structure the payment process at the outset of the project, including determining whether to utilize a schedule of values or statement billings. The timing of the payment applications as well as the appropriate retainage(s) should also be carefully considered.

VII. Protection from Liabilities Affecting Construction Management

A. Theories Of Liability

Not surprisingly, the different scope of services undertaken by the Pure "Agency" versus the "At Risk" Construction Manager results in divergent exposures to liability. Under the latter model, the Construction Manager will have front line responsibility for providing the owner with the completed product in accordance with all cost, schedule and quality requirements. Failure to do so will expose the Construction Manager to liability to the owner.6 Moreover, the Construction Manager will have exposure to the contractor(s) for delay claims, extras and the like. Liability potential also exists vis-a-vis the architect or engineer with whom the owner has contracted (if distinct from the Construction Manager) for certain, limited items related to the Construction Manager's administrative involvement with the designer. Another class of persons to whom the "At Risk" Construction Manager could be liable includes third parties such as workers or other individuals injured during or after the completion of construction.7

The liability exposure of the Pure "Agency" Construction Manager mirrors that of the typical design professional, with perhaps a somewhat increased exposure to the architect or engineer and contractor(s) arising from the Construction Manager's administrative relationship with these entities.

B. Risk Minimization and Risk Shifting

The liability risks discussed above fall generally into two categories: risks to other participants in the project (i.e. owner, contractor(s), design professionals) and risks to third parties (i.e. workers or other individuals injured during or after the completion of construction). The first category of risks can best be minimized through the use of clearly defined roles, rights and responsibilities amongst the various entities involved on the job. To this end the Construction Manager should devote considerable attention to the provisions in the contract with the owner and, in the case of an "At Risk" Construction Manager, in the contract with the contractor(s).8

Equally important as the contract language is assuring that the bid documents and contract documents are clear and as complete as possible so as to avoid problems from arising as the project moves forward.

In addition to the contract protections which can be availed to the Construction Manager, insurance protections should be aggressively pursued in an effort to shift to one or more other entities some or all of the risk assumed, in the first instance, by the Construction Manager.9 Effort should be made to impose upon the contractor(s) an indemnity obligation in favor of the owner, design professional and Construction Manager. Even the tightest indemnity provision, however, will not afford protection beyond the ability of the indemnitor (e.g. the contractor) to pay the Construction Manager's legal fees and related expenses, fund a settlement on behalf of or satisfy a judgment entered against the Construction Manager. Thus, the above indemnity clause should be coupled with a contract requirement that the contractor or other indemnitor procure appropriate insurance to cover the indemnity obligation.

C. Insurance Considerations for the Construction Manager

Unlike the traditional role of the design professional, the Construction Manager has, to varying degrees, responsibility for the actual construction work. Thus, the Construction Manager must take great care to see that construction responsibilities as well as design related responsibilities are adequately protected by the appropriate types and amounts of insurance. Various types of insurance are available to protect against the myriad of liability exposures.10

Professional liability insurance policies provide insurance coverage for damages arising out of the insured's performance of professional services for others in the insured's capacity as an architect or engineer where legal liability is predicated on a negligent act, error or omission. General liability insurance offers protection against the consequences of accidents arising out of the operations of a business and generally exclude coverage for professional services rendered.

A builder's risk policy is a property policy which protects a builder against damage to or loss of the structure which the builder has contracted to complete. Similar but narrower in scope of coverage is the fire insurance policy, which generally insures against only fire, lightning and losses to goods temporarily removed from the premises because of a fire. Construction Managers should also be aware of worker's compensation and employer's liability insurance.

Endnotes

  1. Reasons often cited for construction management's origin include inflation, a strong economy with a busy market, larger, more complex projects, increasingly aggressive schedule requirements, the adversarial relationships on competitive lump sum projects, greater third party intervention and an increasingly litigious environment.
  2. Of course, another common arrangement is to have a general contractor serve as construction manager, providing services during design along with performing the actual construction work.
  3. The "At Risk" Construction Manager is generally not required, however, to be the "guarantor" of the design professional's services. For example, A121/CMc both provide that:
    1. the "At Risk" Construction Manager does not warrant or guarantee estimates and schedules (except as may have been included as part)
    2. of a GMP (See Section IV. below)
    3. the Construction Manager's recommendations regarding design alternatives shall be reviewed and approved by the Owner and the Owner's professional consultants;
    4. the Construction Manager is not responsible to ascertain that the Drawings and Specifications comply with laws, statutes, ordinances, building codes, rules and regulations.
  4. As with the Pure "Agency" Construction Manager, the "At Risk" Construction Manager also maintains an administrative relationship with the architect or engineer.
  5. Factors to consider in prequalifying contractors include the contractor's available office and jobsite personnel, the firm's experience (both project type and familiarity with local laws), the scope of services to be provided by the contractor, the firm's current workload, financial strength and bonding capabilities, the amount of work to be performed by subcontractors as opposed to by the contractor itself, and the firm's safety record and approach to quality assurance from previous clients.
  6. Of course, the construction manager may be able to "pass on" liability to the contractors, design professionals or others whose actual errors or omissions caused the cost overruns, schedule delays or quality inadequacies.
  7. Because the "At Risk" Construction Manager generally has responsibility for the means and methods of construction and for providing a safe construction environment, the typically swift extrication from personal injury suits to which architects and engineers are accustomed would not be possible and the construction manager would likely suffer some losses on these types of claims.
  8. Standard forms of contracts for construction management have been issued by the American Institute of Architects, the Engineers' Joint Contract Documents Committee, the Associated General Contractors (not particularly appropriate for use by the design professional serving as construction manager) and the Construction Management Association of America.
  9. The construction manager should also, of course, consult with professional and general liability carriers to ensure that all of the construction management functions to be undertaken are insurable and, indeed, covered by insurance policies.
  10. In addition to procuring the appropriate insurance coverages, the design professional serving as Construction Manager may wish to consider establishing a separate corporate structure to perform the construction management work. The creation of a separate corporate entity can insulate the design professional from personal liability, since construction management is not professional in nature.

Attribution

Stephen G.M. Stein, Esq. and Marc E. Odier, Esq. Stein, Ray & Conway ("SRC") is one of the largest firms in the United States exclusively devoted to construction law. SRC represents many of the country's largest owners, design professionals and contractors in contract formation, risk management and insurance, business counseling, and dispute resolution. SRC has handled some of the country's highest profile design and construction cases.

The information in this and all other RISK Administration and Management Company articles is intended for information and risk management purposes only and does not constitute legal advice. For legal advice and assistance, please contact competent counsel in the jurisdiction of your professional practice.

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