Legal Issues for Construction Legal Issues for Construction ManagersManagers

ACCM 5ACCM 5thth Annual Conference: Annual Conference:Building Education Facilities Against the Building Education Facilities Against the

OddsOddsMay 19, 2009May 19, 2009

Presented By:Presented By:Mark W. KelleyMark W. Kelley

Miller Brown & DannisMiller Brown & Dannis

Blair ShahbazianBlair ShahbazianMurphy Austin Adams Schoenfeld LLPMurphy Austin Adams Schoenfeld LLP

Our TopicsOur Topics

Legal and practical issues with Alternate Legal and practical issues with Alternate Project DeliveryProject Delivery

What to do when the money runs out What to do when the money runs out (Reprise)(Reprise)

Recordkeeping and documentationRecordkeeping and documentation

Alternate Project Delivery:Alternate Project Delivery:Legal Issues Legal Issues

Design-Bid-BuildDesign-Bid-Build

Sometimes familiar and repetitive is ok; Sometimes familiar and repetitive is ok; the key is to eliminate the repetitive the key is to eliminate the repetitive change order and claims drill that has change order and claims drill that has given this old standby a bad reputation.given this old standby a bad reputation.

Point/counterpointPoint/counterpoint: a strong : a strong prequalification plus competitive bidding is prequalification plus competitive bidding is the most economical approach for most the most economical approach for most districts in today’s markets.districts in today’s markets.

Lease-LeasebackLease-Leaseback

Ed. Code 17406, an old statute put to an Ed. Code 17406, an old statute put to an interesting new (relatively) use.interesting new (relatively) use.

Point/counterpointPoint/counterpoint: the best compromise : the best compromise between cost and control?between cost and control?

What is the CM’s role in LLB?What is the CM’s role in LLB? DeveloperDeveloper CM CM Both?Both?

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D-B-B vs. LLB:D-B-B vs. LLB:Structure Basically Structure Basically

Is The SameIs The Same

=Owner Team

OwnerConstructionManager (Opt.?)

ArchitectLLB Builder or

D-B-B Contractor

Subcontractors

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Background: Background: The 3 ContractsThe 3 Contracts

Preliminary Services Agreement:Preliminary Services Agreement: Developer acts as a pre-construction consultant.Developer acts as a pre-construction consultant.

Site LeaseSite Lease: : District leases the site to Developer.District leases the site to Developer. Terminates when Facilities Lease terminates.Terminates when Facilities Lease terminates.

Facilities LeaseFacilities Lease: : Developer constructs facility per Plans and Developer constructs facility per Plans and

Specs. Specs. Developer leases the facility back to the District.Developer leases the facility back to the District. Developer transfers title of the facility to the Developer transfers title of the facility to the

District upon final payment.District upon final payment.

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Minimizing RiskMinimizing Risk

Generally recommend a Validation Action Generally recommend a Validation Action once Board approves a LLB contract.once Board approves a LLB contract.

Need a strong selection process to get Need a strong selection process to get best Developer.best Developer.

Owner’s team must closely monitor:Owner’s team must closely monitor: Cost vs. estimatesCost vs. estimates Change orders, use of contingency etc.Change orders, use of contingency etc. Final costFinal cost

DisadvantagesDisadvantages

Is the final cost of LLB projects higher?Is the final cost of LLB projects higher? LLB does not automatically bar change LLB does not automatically bar change

orders or claims (but less likely due to orders or claims (but less likely due to Developer’s involvement with design), Developer’s involvement with design), particularly:particularly: Site conditionsSite conditions Owner changes (“Scope creep”)Owner changes (“Scope creep”)

Often will be debates over what extra costs Often will be debates over what extra costs are charged to contingency.are charged to contingency.

CM At-RiskCM At-Risk

CMs are responsible for the construction, CMs are responsible for the construction, not just overseeing the construction. Each not just overseeing the construction. Each trade bids separately to the school district trade bids separately to the school district but the CM takes over responsibility of the but the CM takes over responsibility of the entire construction. entire construction.

CM at risk is problematic on school CM at risk is problematic on school projects because there is no clear projects because there is no clear statutory authority.statutory authority.

CM At-Risk: CM At-Risk: Legal ConsiderationsLegal Considerations

PCC 20111 requires award of public school PCC 20111 requires award of public school construction to the low bidder. construction to the low bidder.

Govt Code 4526 allows award of CM contracts Govt Code 4526 allows award of CM contracts based on demonstrated competence and based on demonstrated competence and professional qualifications--not low bid. professional qualifications--not low bid.

Govt Code 4529.5 defines CM services as project Govt Code 4529.5 defines CM services as project design review and evaluation, construction design review and evaluation, construction mobilization and supervision, bid evaluation, mobilization and supervision, bid evaluation, project scheduling, cost-benefit analysis, claims project scheduling, cost-benefit analysis, claims review and general management and review and general management and administration of construction project--but not administration of construction project--but not construction itself. construction itself.

Ideas, Part 1Ideas, Part 1

Given the potential legal challenges, CMs Given the potential legal challenges, CMs need to try to have the school districts need to try to have the school districts tailor the CM contracts to minimize the risk tailor the CM contracts to minimize the risk that a challenge will be successful. Some that a challenge will be successful. Some suggestions include: suggestions include:

Ideas, Part 2Ideas, Part 2

Each trade contractor needs to provide payment Each trade contractor needs to provide payment and performance bonds and insurance for its and performance bonds and insurance for its portion of the work. portion of the work.

The CM should only bond its services, not the The CM should only bond its services, not the entire construction project. entire construction project.

If possible, avoid having the trade contracts If possible, avoid having the trade contracts assigned to the CM by the District. assigned to the CM by the District.

All documents (contracts, securities in lieu of All documents (contracts, securities in lieu of retention, etc.) should identify the CM as the retention, etc.) should identify the CM as the "CM" and not as the "Contractor." "CM" and not as the "Contractor."

The CM should not indemnify the District for the The CM should not indemnify the District for the trade contractors actions. trade contractors actions.

What To Do When The Money What To Do When The Money Runs OutRuns Out

[Are We Really Talking About This [Are We Really Talking About This Again?!]Again?!]

Funding IssuesFunding Issues

Key issues:Key issues: CommunicationCommunication What do the contract documents say?What do the contract documents say?

Contract suspension and termination Contract suspension and termination issuesissues How and when an Owner can suspendHow and when an Owner can suspend How to minimize and mitigate lossesHow to minimize and mitigate losses How the team can work together to keep costs How the team can work together to keep costs

and frustration to a minimumand frustration to a minimum Issues frequently encounteredIssues frequently encountered

Options When Running Options When Running Out of FundsOut of Funds

Default on the construction contractDefault on the construction contract Terminate or suspend the contract:Terminate or suspend the contract:

For causeFor cause For convenienceFor convenience

Negotiate suspension of the workNegotiate suspension of the work Some other ideasSome other ideas

Suspending or TerminatingSuspending or TerminatingConstruction ContractsConstruction Contracts

First: look at the contract documents for:First: look at the contract documents for: Termination or suspension for causeTermination or suspension for cause Termination or suspension for convenienceTermination or suspension for convenience Force MajeureForce Majeure

Second: figure out where you are on the Second: figure out where you are on the money and on the constructionmoney and on the construction

Recordkeeping And DocumentationRecordkeeping And Documentation

[Dull, Yes, But Important!][Dull, Yes, But Important!]

Keep It CoolKeep It Cool

Recordkeeping needs to be correct, clear, Recordkeeping needs to be correct, clear, concise and impassionate--tell "what concise and impassionate--tell "what happened"--keep out personal opinions unless happened"--keep out personal opinions unless absolutely necessary to the factual record. absolutely necessary to the factual record.

Personal comments or observations of the Personal comments or observations of the contractor's character or personality or similar contractor's character or personality or similar commentary should never be included. commentary should never be included.

Solicit the input of the designer when necessary Solicit the input of the designer when necessary in documenting events--keep track of the in documenting events--keep track of the designer's time of response--you will also be designer's time of response--you will also be documenting for the owner the designer's documenting for the owner the designer's compliance with the standard of care. compliance with the standard of care.

Stay On TopStay On Top

Correctly and clearly document Correctly and clearly document nonconforming work--do not underestimate nonconforming work--do not underestimate the cost and amount of labor it will require to the cost and amount of labor it will require to complete the work properly. complete the work properly.

Timely respond to all inquiries. Timely respond to all inquiries. Respond fully and completely when the CMm Respond fully and completely when the CMm

disagrees with contractor comments--disagrees with contractor comments--especially true with scheduling issues. especially true with scheduling issues.

Assume That Your Letter Assume That Your Letter Will Be Exhibit AWill Be Exhibit A

Remember that everything you say or Remember that everything you say or write may be reviewed by a third party at a write may be reviewed by a third party at a later date and you may be deposed on later date and you may be deposed on same--don't let anything go unanswered or same--don't let anything go unanswered or answered in an incomplete or answered in an incomplete or flippant/passionate manner.flippant/passionate manner.

Owner Team’s Monthly Owner Team’s Monthly Schedule EvaluationSchedule Evaluation

Letter from CM to the Contractor.

You are currently falling behind your baseline schedule on numerous activities:

--Electrical trim and lighting--Interior doors and hardware--Markerboard installation

These delays are due solely to your lack of manpower.

Owner Team Identifying Owner Team Identifying the Critical Paththe Critical Path

Letter from CM to the Contractor.

Your letter to the District identifies Owner decisions as critical. However, the critical path is now your rework of the canopy walkways outside the classrooms.

Defining the CauseDefining the Cause

Letter from Construction Manager to Contractor.

Demolition work is still incomplete. Your refusal to perform your contract work continues to severely delay the completion of this building.

As discussed, it is apparent that there is a shortage of manpower to complete all the necessary activities.

Notice to ContractorNotice to Contractor

Letter from Owner to Contractor.

We are hereby informing you that we will enforce liquidated damages due to your delays in the library building. These delays have prevented the District from taking occupancy.

When the Contractor When the Contractor Keeps the Meeting MinutesKeeps the Meeting Minutes

There is a significant problem with slow responses to RFI’s and open items, and this has resulted in project schedule delay.

Thank you!Thank you!

How to Reach UsHow to Reach Us Mark Kelley (415) 543-4111 Mark Kelley (415) 543-4111

mkelley@mbdlaw.commkelley@mbdlaw.com Blair Shahbazian (916) 446-2300Blair Shahbazian (916) 446-2300

bshahbazian@murphyaustin.combshahbazian@murphyaustin.com