Construction Manager Agreements

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October 02, 2018
Author: Sarah Love
Organization: Bays Lung Rose & Holma

The Construction Management Association of America (“CMAA”) defines construction management as professional management practices applied to construction projects from inception to completion for the purposes of controlling time, scope, cost, and quality.1 The scope of a construction manager’s responsibilities is defined by contract, but is generally limited to ensuring that the project is executed smoothly and in compliance with design plans and specifications. Unless contracted to the contrary, a construction manager does not participate in the actual construction of the project, but rather, supervises the contractor’s work and coordinates inspections and meetings with design consultants and government agencies. If a construction manager is also contracted to serve as a contractor, the construction manager may begin its duties in the planning and budgeting stage, then proceed to work on the project as both construction manager and contractor, assuming the duties of both roles.

Construction management is typically found in two general forms: an agency construction manager and a construction manager at-risk.2 An agency construction manager is used by the owner as an independent agent to oversee, schedule, and coordinate the services of the architect and contractor over the lifetime of the project, or possibly only for a particular phase of the project.3 An agency construction manager contracts directly with the owner, is compensated much like a design professional or other professional consultant on a fee for service basis, and its liability does not extend to construction delays or cost overruns by the contractor’s acts or omissions.4 A construction manager at-risk, however, in addition to providing services during the design and pre-construction phases, is also used by the owner for actual construction of the project.5 In this situation, the construction manager at-risk holds the contracts with the trade professionals and bears the risk of late completion, defective performance, and cost overruns.6

A construction manager plans, coordinates, budgets, and supervises work on a construction project. When the concept of construction managers first arose, it was mostly performed by architects and engineers that were looking for a way to expend the types of services they could provide to a project.7 Today most construction managers have a general contracting background.8

Construction managers can be utilized during the planning and design stage, for the completion of the project, and to serve as an intermediary between contractors and design consultants, on the one hand, and the owner on the other hand. Because of the wide range of potential construction and design issues on a project, a construction manager should have knowledge in a wide variety of construction-related areas, such as planning, permitting, licensing, budgeting, procurement, and construction techniques.

A construction manager may be selected during the design and schematic phase of the project, in order to ensure that the appropriate planning, budgeting, and procurement work can be done. If the construction manager is coming from a contractor background as opposed to a design background, it should be careful not to overstep into services that need to be provided by a licensed professional. Typical responsibilities of a construction manager during the pre-design, design and construction phases include:
• Assisting in developing project objectives and identifying the roles, responsibilities, and authority of project team members;
• Preparing costs estimates, budgets, and construction schedules;
• Assisting in analyzing value engineering options;
• Reviewing the plans and specifications for issues with constructability;
• Selecting appropriate construction methods;
• Meeting with contractors and design professionals to ensure compliance with safety procedures, quality control procedures, and completion schedules;
• Assisting in obtaining necessary permits and licenses;
• Assisting in developing criteria for and selecting trade contractors;
• Ensuring that all contract provisions are being complied with;
• Interacting with design consultants to resolve design issues and facilitate design changes in conjunction with ongoing construction activities;
• Coordinating site inspections by design consultants and governmental agencies;
• Supervising onsite work by contractors and subcontractors;
• Recording the progress of the work on the project and preparing progress reports on the work of the prime contractor;
• Reviewing pay applications from the contractors and subcontractors during the project; and
• Reviewing closing documents to ensure compliance with project plans and specifications.

One of the main goals in having a construction manager is to increase the owner’s confidence in the success of a project.9 Recognized benefits of using a construction manager include gaining professional advice and recommendations on the effective use of available funds, control over the scope of the work, optimal project scheduling, added expertise from additional professionals on the project, strategies to avoid delays, claims and changes, and enhanced construction quality and design.10 It is important for both the owner and the construction manager to research the possible business relationship that they may be entering into given the risks associated with acting as a construction manager on a project. While certain risks can be shifted or modified via contract, doing the proper due diligence before entering into a contractual relationship is always the best course of action. Possible questions to ask prior to entering into an owner-construction manager relationship include:

• What is the reputation of the owner/construction manager? Is there a reputation of defaulting on other projects?
• Is the owner/construction manager litigious or difficult to work with?
• What is the owner/contractor’s financial position? What resources are available?
• What is the owner/construction manager’s experience level?

There are a number of different types of contracts that a construction manager may enter into, each with their own features and considerations based on factors such as scope of the project, the time horizon of the project, and whether the construction manager will also serve as a contractor. Trade organizations like the American Institute of Architects (“AIA”), CMAA, and the Associated General Contractors of America (“AGC”) have standard form contracts for construction managers that can be utilized in conjunction with their other standard forms for designers and contractors.

Construction manager contracts may contain different methods of compensating construction managers for their work. For example, payment may be made by stipulated sum, whereby the owner agrees to pay a fixed fee for the construction manager’s services. Payment may also be made in the form of the cost of work, plus the contractor’s fee, with or without a guaranteed maximum price. In contracts with a guaranteed maximum price, the construction manager assumes financial responsibility for the construction of the project. In the context of an agency construction manager, cost of the work is typically based upon a rate and hour basis. The construction manager may also request a fee on top of the cost of the work to account for profit. A fee based upon a percentage of the cost of the construction contract is not recommended as it may not be reflective of the effort required.

A construction manager’s contract should also define the construction manager’s responsibilities on the project, which will be negotiated according to the project’s specific needs. Specific considerations to take into account when negotiating a construction manager contract include the scope of services, termination or suspension, insurance, limitation of liability, indemnification, pre-construction estimates, and a waiver of consequential damages.

A. Scope Of Services
The contract should clearly define the scope of services to be provided by the construction manager. This includes what services are included as a part of the contract and what specific services are excluded. Additionally, the contract should clearly spell out what services the construction manager will perform for additional consideration and how the payment will be made. The construction manager should also consider whether to include time or number limitations on the services to be provided. How many estimates will be provided? How many site inspections will be performed and on what intervals? The construction manager contract should clearly state that the construction manager is not assuming any responsibility for the design of the project and, if the construction manager is not the contractor, the contract should also include language that the construction manager is not responsible for construction means and methods of the prime contractor other then to notify owner if the construction manager feels that any changes to the construction means and methods are necessary. Moreover, the contract should outline what reimbursable costs the construction manager is entitled to, including, but not limited to, permitting costs, reproduction of plans and specifications, and other considerations.

From the owner’s perspective, the contract should include a recitation acknowledging that the construction manager has a fiduciary relationship with the owner and covenants to the owner to, at all times, use the construction manager’s best professional skill and judgment in providing construction management services in an expeditious and economical manner consistent with the objectives and best interests of the owner.

B. Termination Or Suspension
Consistent with owner-contractor agreements, an owner-construction manager agreement should include provisions that govern when the contract may be suspended or terminated. This includes termination for cause provisions and a termination for convenience provision for the owner. The owner shall maintain termination for cause based upon failure to perform. Conversely, a construction manager’s ability to terminate should be linked to the owner’s non-payment.

C. Insurance
As with contractors, an owner should ensure that its construction manager has the necessary insurance for the project to cover potential risks. This includes: (1) worker’s compensation insurance; (2) commercial general liability insurance; (3) automotive insurance; and (4) errors and omissions insurance. The contract should also require that any consultants working under the construction manager also procure the same types of insurance and written evidence of the same should be provided to the owner. Any time a construction manager enters into a contract for services for a new project, it should discuss the contract requirements for insurance coverage with its insurance broker to ensure that the construction manager’s insurance policies provide the type of coverage required by the contract.

D. Limitation Of Liability
Depending upon the size of the project, the construction manager should consider including a limitation of liability for its services. If the construction manger is only providing pre-construction services, the construction manager may want to cap its liability to the owner given the reduced size of the fee the construction manager will be receiving for its services. Owners, on the other hand, should be cautious of limitations of liability.

E. Indemnification
From the construction manager’s perspective, the indemnification provision should be narrowly tailored and should: (1) be limited to bodily injury and property damage which arise from the performance of the work of the construction manager – consistent with the coverage provided by the construction manager’s commercial general liability policy; (2) cover the negligent act or omission by the construction manager and those under which it is directly responsible; (3) be limited to losses suffered by third parties; (4) exclude the architect as an indemnified party; (5) exclude damages caused by breach of contract; and (6) include an acknowledgement that the indemnification obligation does not exclude or limit the construction manager’s right to seek contribution or indemnity from other parties who have shared responsibility for any losses.11

From the owner’s perspective, the contract should include language providing the owner with the right to withhold payments from the construction manager to cover claims made, asserted, or threatened and covered under the indemnification obligation. The owner should retain the right to withhold a sufficient amount in the owner’s judgment to cover the liability.

F. Pre-Construction Estimates
If, as a part of the pre-construction services, the construction manager will be providing estimates for the cost of the work, the contract should include language stating that the construction manager does not warrant or guarantee that the bid prices that will be subsequently obtained from trade contractors will be the same as the construction manager’s estimate or be within the owner’s budget. This limiting language, however, should not apply at the time the owner requests a guaranteed maximum price from the construction manager at-risk.

G. Waiver Of Consequential Damages
Consequential damages are foreseeable losses that result from an inability to use an improvement. Consequential damages can result from a breach of contract or an injury to person or property resulting from the construction manager’s breach of warranty. As is typical with construction contracts, construction managers should be mindful to include a mutual waiver of consequential damages provision into the contract. Without a waiver of consequential damages, the construction manager could face liability for damages well in excess of the services that it performed on the project, given the type of project.

2 See id. at 1.
3 Id.
5 Id. at 260.
6 Id.
8 Id.
9 See Construction Management Association of America, supra note 1, at 10.
10 Id.
11 See Martinez, supra note 7, at 315.

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