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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 contruction 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.
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A. Pure "Agency" Construction
Management
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As the name implies, a Pure
"Agency" Contruction Manager is merely an agent
of the owner -- neither designing nor constructing the
project. Instead, the Pure "Agency"
Construction Manager administers the construction
contract throughout the planning, design and construction
phases of the project. As a general proposition, the Pure
"Agency" Construction Manager is usually
empowered to:
Under this model of construction management, the
owner contracts separately with the Consruction 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.
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B. "At Risk" Construction
Management
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Contrasted to the Pure "Agency"
Construction Manager is the "At Risk"
Construction Manager, who provides advice and
construction leadership on a project during the planning
and design phases(3) and
provides construction leadership, contract management,
direction, supervision, coordination, and control of the
work during the construction phase. While the owner
generally will contract separately with the design
professional(4), the Construction
Manager contracts directly with the trade
contractors. Under this scenario, the Construction
Manager has control over the means and methods of
construction, the management and safety of workers and
delivery of the completed work consistent with the
owner's cost, time and quality requirements.
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 Constuction 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
constructiion 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 dicussed 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, responsiblity 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
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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.
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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.
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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:
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I. the "At Risk" Construction
Manager does not warrant or guarantee
estimates and schedules (except as may
have been included as part)
II. of a GMP (See Section IV. below)
III. the Construction Manager's
recommendations regarding design
alternatives shall be reviewed and
approved by the Owner and the Owner's
professional consultants;
IV. the Construction Manager is not
responsible to ascertain that the
Drawings and Specifications comply with
laws, statutes, ordinances, building
codes, rules and regulations.
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As with the Pure
"Agency" Construction Manager, the
"At Risk" Construction Manager also
maintains an administrative relationship with the
architect or engineer.
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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.
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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.
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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.
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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.
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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.
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In addition to
procuring the appropiate 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 consitute legal
advice. For legal advice and assistance, please contact competent
counsel in the jurisdiction of your professional practice.
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