Legal Issues for Construction Managers

1. Legal Issues for Construction Managers ACCM 5th Annual Conference: Building Education Facilities Against the Odds May 19, 2009 Presented By: Mark W. Kelley Miller Brown & Dannis Blair Shahbazian Murphy Austin Adams Schoenfeld LLP

2. Our Topics • Legal and practical issues with Alternate Project Delivery • What to do when the money runs out (Reprise) • Recordkeeping and documentation

3. Alternate Project Delivery:Legal Issues

4. Design-Bid-Build • Sometimes familiar and repetitive is ok; the key is to eliminate the repetitive change order and claims drill that has given this old standby a bad reputation. • Point/counterpoint: a strong prequalification plus competitive bidding is the most economical approach for most districts in today’s markets.

5. Lease-Leaseback • Ed. Code 17406, an old statute put to an interesting new (relatively) use. • Point/counterpoint: the best compromise between cost and control? • What is the CM’s role in LLB? • Developer • CM • Both?

6. D-B-B vs. LLB:Structure Basically Is The Same Owner Construction Manager (Opt.?) LLB Builder or D-B-B Contractor Architect Subcontractors =Owner Team 6

7. Background: The 3 Contracts Preliminary Services Agreement: Developer acts as a pre-construction consultant. Site Lease: District leases the site to Developer. Terminates when Facilities Lease terminates. Facilities Lease: Developer constructs facility per Plans and Specs. Developer leases the facility back to the District. Developer transfers title of the facility to the District upon final payment. 7

8. Minimizing Risk Generally recommend a Validation Action once Board approves a LLB contract. Need a strong selection process to get best Developer. Owner’s team must closely monitor: Cost vs. estimates Change orders, use of contingency etc. Final cost 8

9. Disadvantages • Is the final cost of LLB projects higher? • LLB does not automatically bar change orders or claims (but less likely due to Developer’s involvement with design), particularly: • Site conditions • Owner changes (“Scope creep”) • Often will be debates over what extra costs are charged to contingency.

10. CM At-Risk • CMs are responsible for the construction, not just overseeing the construction. Each trade bids separately to the school district but the CM takes over responsibility of the entire construction. • CM at risk is problematic on school projects because there is no clear statutory authority.

11. CM At-Risk: Legal Considerations • PCC 20111 requires award of public school construction to the low bidder. • Govt Code 4526 allows award of CM contracts based on demonstrated competence and professional qualifications--not low bid. • Govt Code 4529.5 defines CM services as project design review and evaluation, construction mobilization and supervision, bid evaluation, project scheduling, cost-benefit analysis, claims review and general management and administration of construction project--but not construction itself.

12. Ideas, Part 1 • Given the potential legal challenges, CMs need to try to have the school districts tailor the CM contracts to minimize the risk that a challenge will be successful. Some suggestions include:

13. Ideas, Part 2 • Each trade contractor needs to provide payment and performance bonds and insurance for its portion of the work. • The CM should only bond its services, not the entire construction project. • If possible, avoid having the trade contracts assigned to the CM by the District. • All documents (contracts, securities in lieu of retention, etc.) should identify the CM as the "CM" and not as the "Contractor." • The CM should not indemnify the District for the trade contractors actions.

14. What To Do When The Money Runs Out[Are We Really Talking About This Again?!]

15. Funding Issues • Key issues: • Communication • What do the contract documents say? • Contract suspension and termination issues • How and when an Owner can suspend • How to minimize and mitigate losses • How the team can work together to keep costs and frustration to a minimum • Issues frequently encountered

16. Options When Running Out of Funds • Default on the construction contract • Terminate or suspend the contract: • For cause • For convenience • Negotiate suspension of the work • Some other ideas

17. Suspending or TerminatingConstruction Contracts • First: look at the contract documents for: • Termination or suspension for cause • Termination or suspension for convenience • Force Majeure • Second: figure out where you are on the money and on the construction

18. Recordkeeping And Documentation[Dull, Yes, But Important!]

19. Keep It Cool • Recordkeeping needs to be correct, clear, concise and impassionate--tell "what happened"--keep out personal opinions unless absolutely necessary to the factual record. • Personal comments or observations of the contractor's character or personality or similar commentary should never be included. • Solicit the input of the designer when necessary in documenting events--keep track of the designer's time of response--you will also be documenting for the owner the designer's compliance with the standard of care.

20. Stay On Top • Correctly and clearly document nonconforming work--do not underestimate the cost and amount of labor it will require to complete the work properly. • Timely respond to all inquiries. • Respond fully and completely when the CMm disagrees with contractor comments--especially true with scheduling issues.

21. Assume That Your Letter Will Be Exhibit A • Remember that everything you say or write may be reviewed by a third party at a later date and you may be deposed on same--don't let anything go unanswered or answered in an incomplete or flippant/passionate manner.

22. Owner Team’s Monthly Schedule 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.

23. Owner Team Identifying the 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.

24. Defining 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.

25. Notice 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.

26. When the Contractor Keeps 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.

27. Thank you! • How to Reach Us • Mark Kelley (415) 543-4111 mkelley@mbdlaw.com • Blair Shahbazian (916) 446-2300 bshahbazian@murphyaustin.com