CONSTRUCTION MANAGER AS AGENT
(The Owner’s Perspective)
April 1, 2006
by
Stanley J. Dobrowski, Esq.
Calfee, Halter & Griswold LLP
1100 Fifth Third Center
21 East State Street
Columbus, Ohio 43215
(614) 621-1500
(614) 621-0010 (Facsimile)
email:
In its simplest form the traditional “design-bid-build” construction delivery system involves three participants: (1) the project Owner, (2) the Architect or other design professional and (3) the General Contractor. For any number of reasons, both practical and legal, an Owner may seek to alter or eliminate the relationship with the General Contractor. One means to accomplish this end is for the Owner to engage a Construction Manager as the Owner’s agent or representative.
A Construction Manager usually has construction experience as a General Contractor or derived from the architectural or engineering background of its staff. A Construction Manager typically assists an Owner by providing (1) additional expertise on value engineering, constructability and scheduling during the design process and (2) management or administration of the construction process. Functionally, a Construction Manager should be distinguished from a “clerk-of-the-works” who merely facilitates record keeping and paper flow by the Construction Manager’s direct involvement in and responsibility for managing the Project, particularly in scheduling, claims avoidance and resolution and coordination of Contractors. Sagamore Group, Inc. v. Commissioner of Transportation (App. Ct. 1992) 29 Conn. App. 292, 614 A. 2d 1255.
Construction Management delivery systems are usually described as being either of two types: (1) Construction Manager “as agent”[1](aka “as representative” or “as advisor”) or (2) Construction Manager “at risk” or “as constructor.” The distinguishing feature is whether the Construction Manager holds the contracts of the Contractors involved, i.e. whether the Construction Manager has the risk of nonperformance by those Contractors. When the Owner holds the contracts, the Construction Manager is described as being an “agent” of the Owner. When the Construction Manager holds the contracts, the Construction Manager is described as being “at risk.”
The use of a Construction Manager as agent is particularly attuned to the legal requirements of public construction in Ohio. The Ohio School Facilities Commission engages a Construction Manager for each project in its program, a program estimated to take over 10 years at a cost in excess of $20 Billion. The Ohio Building Authority, which has built or renovated 6 office towers and constructed a Cesar Pelli designed performing arts center also engages a Construction Manager for each project.
In the Ohio public sector, the selection of Construction Managers is governed by Sections 9.33 to 9.333 of the Ohio Revised Code. Because Section 9.33(A) defines a Construction Manager as a person who does not actually perform construction, government entities in Ohio are limited to entering in a Construction Manager “as agent” relationship. Since the Construction Manager cannot perform construction, it is effectively precluded from holding contracts under which persons responsible to the Construction Manager perform construction, i.e. from being “at risk.” Moreover, a contrary interpretation would effectively permit evasion of the Multiple Prime Contractor requirements of Sections 153.50 to 153.52 of the Ohio Revised Code. Under those Sections most Ohio government entities are required to construct projects using Multiple Prime Contractors instead of a General Contractor. Ohio is one of only four or five states which have such a requirement.
In the Multiple Prime Contractors delivery system, the Owner hires several Prime or Trade Contractors instead of one General Contractor. Section 153.50 effectively requires that at least four Prime Contractors be engaged: (1) Plumbing, (2) Electrical, (3) Heating, Ventilating and Air Conditioning (“HVAC”) and General Trades. The General Trades Contractor performs all work not performed by the other three Contractors. Often, the General Trades Contract will be divided into several packages of discrete work, such as painting, cleaning and fire suppression. Each of these discrete packages will be separately awarded and the Project will then have still more Prime Contractors. A large, complex Project may have 40 Prime Contractors or more.
The justifications usually given for the use of Multiple Prime Contractors are (1) the Owner can serve as its own General Contractor, (2) General Contractors sometimes do not perform truly valuable service since they “broker” the work to subcontractors and (3) the Owner saves the profit and overhead the General Contractor would have charged. In addition, mechanical Contractors argue that, in this era of high technological sophistication of the components they construct, a need exists for direct communication between them and the Owner.
The disadvantages of using Multiple Prime Contractors largely involve the need to schedule, coordinate and provide day-to-day administration of the Multiple Prime Contractors. These duties are responsibilities of the Owner. Valentine Concrete, Inc. v. Ohio Department of Administrative Services (Ct. Claims 1991) 62 Ohio Misc. 2d 591 and 626; Royal Electric Construction Corp. vs. Ohio State University (February 19, 1993) Ct. Claims Case No. 90-05520. Further, these duties are sometimes referred to as the “non-delegable duties” to indicate that the Owner may not effectively avoid them by contractually providing that the Multiple Prime Contractors shall schedule, coordinate and administer among themselves.
To fulfill the “non-delegable duties” the Owner must either assign its own employees to perform them or engage professional assistance. Most Owners, particularly in the public sector where a construction project may be a once-a-decade event, do not have sufficiently experienced personnel who can devote most of their time to a Project on staff nor is it an economically sensible decision to hire full-time employees whose skills and experience are unlikely to be used once a Project is complete. As a result, someone must be contractually engaged to perform the necessary duties during the pendency of the Project.
The obvious choice for this role is a Construction Manager. In many cases, however, the addition of a Construction Manager is deemed too expensive. In other cases, the Architect will be uncomfortable that someone else will be a “representative” of the Owner and may be “second-guessing” the Architect. In either of these cases, an Owner might seek to have the Architect perform the required services. Some Architects, however, will object that they are not trained or experienced in such services. Another objection sometimes made is that such services are not covered by the Architect errors and omissions insurance.[2]
A variant of Design/Build, sometimes called Design/Construction Management, has been suggested for use in the Ohio public sector. Design/Construction Management generally involves the engagement of a Design/Construction Management Team by a selection process comporting with Sections 153.65 to 153.71 of the Ohio Revised Code (qualification-based selection process for design professionals) and Sections 9.33 to 9.333 of the Ohio Revised Code (qualification-based selection process for construction managers), competitive bidding of construction contracts which are held by the Owner and a Guaranteed Maximum Price from the Design/Construction Management Team. The basic idea is that the Design/Construction Management Team will accept the risk of problems on the project in exchange for a premium fee. The suggestion has not, however, been much adopted in practice largely because of the unwillingness of Construction Managers and design professionals to accept the liability for a Guaranteed Maximum Price without direct control of the Contractors afforded by holding the construction contracts. TRW, Inc. v. Fox Development Corp.(4th Ct. App. 1992) 604 N.E. 2d 626.
The one obvious disadvantage of a Construction Manager “as agent” is that the Owner must pay an additional fee. On a Multiple Prime Contractors project, the Construction Manager’s fee is offset by the avoidance of a General Contractor’s “mark-up,” at least theoretically. The real question is whether the Owner receives additional services of sufficient value to justify the fee. While this question must be resolved on a project by project basis, it often results in Construction Managers being involved in complex projects or when the Owner does not have significant construction expertise.
A Construction Manager can provide value to the design process of a Project by making suggestions about the scope of the work to reduce the cost of the design (value engineering) and making suggestions to ease the construction of the design (constructability). In some cases, the Construction Manager may actually create a summary “Scope of Work” document which supplements the Architect’s Technical Specifications by describing the anticipated steps in the construction process and the responsible contractor. A Construction Manager may also have superior knowledge about the availability of labor and critical materials and the lead times necessary for timely delivery of materials which may improve estimates of cost and time as well as additional information about the capabilities of various Contractors. Finally, the Owner may wish to require the Construction Manager to prepare detailed estimates of cost at each stage of design to protect against “budget creep.” Those estimates will also make it easier to create an accurate estimate of costs when bids are sought or construction contracts are negotiated.
The Construction Manager will typically review or prepare bidding documents and may prepare Division 1 of the Technical Specifications which addresses administrative items for the entire project. The Construction Manager will assist in establishing packages for separate bidding by Contractors, conduct pre-bid and pre-aware meetings and the opening and tabulation of bids, investigate the capabilities of bidders and subcontractors, and will provide the Owner with written recommendation about the award or rejection of bids. Once the Owner has selected bidders, the Construction Manager will transmit Notices of Award and to Proceed, collect remaining paperwork such as insurance certificates or policies, provide notices to sureties, if any, and assist the Owner with the preparation and recording of lien filings and mortgage filings and the Contractors with obtaining permits.
During the construction phase of a Project, a Construction Manager may provide daily on-site supervision as opposed to the “periodic” site visits typically provided by design professionals. The Construction Manager will usually implement or oversee a Project safety program as opposed to the aversion to involvement in safety matters of most design professionals, based upon concerns about liability. The Construction Manager can also provide an informal claim resolution process which can keep minor matters from turning into significant disputes and will participate in any formal dispute resolution or litigation. The Construction Manager will also assist or coordinate project close-out activities such as punch-list inspections, commissioning and the turnover of operation and maintenance manuals and “as built” drawings.
In scheduling, the Construction Manager’s role is often critical. From the Owner’s perspective the Project Schedule must be created, updated and enforced. Some Construction Managers will attempt to dictate the Project Schedule to the Contractors. The difficulty with such an approach is that it often fails to achieve “buy-in” from the Contractors. As a result, when delays arise so do complaints that the Schedule was unrealistic from the outset.
While more difficult to create, a Project Schedule arrived at with significant input from the Contractors is likely to be more realistic. After all, it is the Contractors who will actually perform the work. When delays occur, resolving them by adjusting the Schedule may be less adversarial if everyone involved feels some responsibility for having created it. Typically, the contract documents will require that the Construction Manager and the Contractors create a Project Schedule in 30 days. Sometimes the process will commence with each Contractor submitting its schedule for incorporation by the Construction Manager into an overall Project Schedule. The Contractors will then have an opportunity to seek revisions to the overall Schedule. In other cases the Construction Manager will produce a preliminary Project Schedule and provide it to the Contractors who will respond with revisions. In still other cases, particularly in the public sector, the Owner will include a schedule for the first 30 to 90 days of the Project in the bidding or contract documents. The Construction Manager and the Contractors will then follow that initial schedule until they produce a Project Schedule. However the process is initiated, hammering out a final Project Schedule often requires a meeting which the Construction Manager should call and chair. In order to be effective in this role, the Construction Manager must be thoroughly familiar with the Owner’s requirements, particularly milestone and completion dates. Owners can assist this process by providing as much flexibility as possible. Artificial or unrealistic dates rarely serve the Owner well.
Similarly, the Construction Manager must assure that Contractors deliver schedule updates as required by the contract documents. It will be difficult, if not impossible, for the Construction Manager to sensibly revise the Project Schedule without timely information from the Contractors. Often Contractors will be required to provide a schedule update for work accomplished in the past week and a “look ahead” estimate of work to be accomplished in the next two weeks at weekly progress meetings. By analyzing this information and incorporating it into a revised Project Schedule, the Construction Manager should be able to keep the Owner informed about whether the project is proceeding as anticipated or whether float is being consumed without work being accomplished.
The Construction Manager should also be able to alert the Owner to the possibility that the critical path of the project will be delayed. If delay is anticipated or actually occurs, the Owner should expect the Construction Manager to suggest a recovery schedule and to obtain approval of that schedule from the Contractors or of one proposed by the Contractors in order to prevent or recover from the delay.
In addition, the contract documents often require the Construction Manager to keep a daily log showing work accomplished, deliveries made, equipment on site and the presence of appropriate types of labor and numbers of the workforce. The Owner should expect the Construction Manager to use this information to address with the Contractors any deficiencies observed which may threaten the schedule.
To support the Construction Manager’s efforts to create, update and enforce the schedule the contract documents must provide that no payment will be made to Contractors without an initial or updated Project Schedule, as applicable. In addition, the contract documents may provide the Owner with discretion to back-charge, suspend or terminate a Contractor who fails to comply with the requirement to produce or update the Project Schedule. The Construction Manager can provide valuable insight about which alternative is appropriate.
The Construction Manager can play significant roles in two aspects of the payment process. First, the Construction Manager can assist or even supplant the Architect is much of the review of Contractor Payment Requests. The Construction Manager can receive all payment requests, review them for completeness and make an assessment of whether the amount requested is proportionate to the state of completion of the project. Overpaying a Contractor can create not only difficulties in obtaining complete performance from that Contractor but may cause a surety to deny a claim against a performance bond. Because the Construction Manager is often on the project site fulltime, it can often produce a superior estimate of the percentage of completion of the Project, especially if the Owner requires the Construction Manager to track actual costs against the Project Budget. The one thing that the Construction Manager may not be able to do is to determine whether the work conforms to the contract documents as this often requires the judgment of a licensed design professional.
To support the Construction Manager’s role in the payment request process the contract documents must provide that the Construction Manager can either withhold amounts requested and assess liquidated damages against them subject to review by the Owner or recommend to the Owner that such actions be taken. The Construction Manager’s position with the Contractors may be further enhanced and the Owner may derive additional comfort from requiring that the Construction Manager sign each payment request before either the Architect or the Owner signs it.
Second, the Construction Manager may be given authority to review and negotiate Change Orders. Typically, a bulletin or scope of work letter is prepared by the Architect and delivered to the Contractors. Each affected Contractor responds with a proposal for an increase or decrease in the contract price and contract time. The Construction Manager with its familiarity of the project and the labor and materials market should review the proposal to assure that it comports with any limits imposed by the contract documents and project and market realities and negotiate the proposal to an appropriate amount. Again, the Owner may wish to require that the Construction Manager sign each Change Order before the Owner signs it. Similarly, if the contract documents permit the Owner to require that work be done without a Change Order and to establish a price for the work, the Construction Manager should assist the Owner to determine an appropriate price.