CM v. GC - page 14

A lot of the problem with this construction manager – agent (not at risk) method is that Missouri passed a law allowing it but did not really think through the problems. This was tacked on to the law (I think in 1993) and one of the many school service groups drew up a 9-point list for districts to follow. School districts then hired CMs based on sales pitches and those 9 points which were then modified by the district superintendents. Under the Missouri Revised Statutes, the school district cannot enter into any “not to exceed” or guaranteed maximum clauses, which are common in private work. A private owner is not constrained from writing terms and conditions into contracts which define liability and specify special conditions. A public owner cannot write contractual terms which conflict with state law for that public body. Also, the CM-agent cannot do any construction work on the project – he must be strictly an advisor and paper pusher – the school district is the “general contractor”. The CM does not, under the law, assume any legal liability for anything that happens in construction.

The more I study this and look at court cases, the more concerned I become. I shudder to think about the potential liability that school districts are taking on by doing this. If a child crawls under a construction fence and is injured or killed, or there is a fire which begins on the construction site that injures 10 students, the school district has just become a major litigant in a very complex legal case, and the CM has no liability.

I participated in a seminar for the Council of School Attorneys to try to flag some of these issues for attorneys who do not normally deal with construction issues. In at least one case, I suspect that the administrator on the last project signed the contract presented by the CM without ever having it reviewed by the school’s attorney. That contract was very simplistic and one-sided. I am not an attorney, but I believe a thorough review of the documents, including the legal and insurance obligations related to the school districts acting as their own general contractors, would be frightening. I really wonder what the schools’ liability carriers think of this, or if they are even notified when a construction project begins.

Most school administrators truly believe that a construction manager and a general contractor are the same, but that by hiring a CM, they get to choose their firm and pay less. They do not really know what each does, what services each provides, nor the real fees that are charged. Most administrators and board members think of construction in terms of building a house, and do not know the many complexities and legal issues in institutional and industrial construction. They have no idea what an architectural firm does except drawing plans for a building, know almost nothing about the engineering, the various building codes, the liability issues, etc.

In my opinion, the problem is not the firms involved, but this process. Overruns and excess charges occur for several reasons, not the least of which is that administrators think they can use the system to change and redesign as they go along, rather than committing to a complete and thorough up-front design. This leads to misunderstandings and dissatisfaction about what was promised and what was actually built by the employees of the district and the public. Disagreements and misunderstandings are common in construction, and occur frequently if communication processes are not well-managed by all sides. Without a thorough planning and design process, cost overruns are inevitable.

When the State decided to write this law, it opened the door for “super salesmen” to take advantage of public money. Construction management at risk has always been an option in the private sector, with both parties hopefully fully aware of their risks. The problems arise as more and more public owners fall for the line about advantages of the method in the private sector, not realizing that those advantages do not hold true for public work. As school work by competitive bid dries up, it forces more general contractors to turn to construction management-agent proposals even though they know it is not advantageous for the school district. That is one of the reasons that the up-front fee quoted by CMs to school districts has started to drop from 4.5% and up to as low as 1%. They have all figured out how to get the job first, and then collect by “reimbursables” and change order percentages. The CM benefits under this method by having less complete drawings, etc. Trade contractors, too, have figured out how to game the system. Trade bids are made through manufacturers when the trade contractors cannot be bonded, bids are made by a firm willing to front the bonds for a fee; high dummy bids are solicited and bid to cover up that only one authentic trade bid will be in a category, etc.

It is a big and complex issue, which very few people want to take the time to understand, but it is costing the taxpayer big bucks and public owners' money that is needed for other purposes. School districts aren't the only public bodies being taken. In our area, a county commission and a county hospital have been "sold." Many contractors and architects are afraid to speak up for fear it will cost them jobs. There are contractors out there who are trying to get around this by bidding ALL the work packages at once, effectively turning a project into a general contracting job. One administrator wondered why he was now paying twice for the same work, since he had both a CM-agent and a general contractor on his project. Actually, he didn't, as the CM could not do any work. The problem was, he was paying the CM in the manner normally used to pay a general contractor, as a percentage of the contract amount, rather than having a fee structure in which cost overruns and change orders did not benefit the CM. By having a flat fee or sliding scale without reimbursables and percentages tied to the contract amount, the owner could have required the CM to actually represent the public owner's interest and would have known up front what the total expected cost of the project would be.

General Contractor v Construction Manager, p 13

A large central Missouri school district is in the process of designing and building several new buildings. The local newspapers reported that the district has added the new position of "construction manager" to its staff. This person is to be paid an annual salary of $85,000.
As I reported in the last blog page, retired construction personnel can be hired for much less to perform paper pushing duties and act as the representative of the school district than a construction management firm. This district has plans to spend approximately $60 million on its construction program. If a cm-agent firm were hired at the rates paid to the district I cited earlier, that amount would be in excess of $6 million, without factoring in the markups of trade contractors bidding to a cm-agent. By adding a new staff position to its facilities department, this large school district will pay $850,000 for the next ten years in salary for the same work, plus it will save at least another 10-15% in reduced costs for the same construction work by bidding the work to general contractors.

These same figures apply to any public building, whether county, city, hospital or other public agency, which fall under the definitions in the Missouri Revised Statutes.

I have been asked about the applicable laws that govern these types of public construction issues. The Missouri Revised Statutes most applicable are:

Chapter 177, School Property and Equipment, Section 177.086, Also, section 177.082,

Chapter 327, Architects, Professional Engineers, Land Surveyors and Landscape, Section 327.465

Chapter 8, State Buildings and Lands, Sections 8.675 to 8.687.

Chapter 432, Contracts to be in writing, Section 432.070

General Contractor v Construction Manager, p 12

A school district parent asked me about a recently-made decision to hire a construction manager. It seems that a former school superintendent had retired and then secured a job as a representative of a construction management firm. The district's criteria for selecting the construction manager - agent was written with the help of that person.

The parent had attended the school board meeting in which three proposals were submitted and discussed. The primary focus of discussion was on the percentage fee listed in the proposals. The parent stated that no board member asked about the "reimbursables" or any of the other duties of the construction manager. However, the superintendent made a point of noting that one of the nine points in the requests for proposal was that the cm - agent present letters of reference from "school districts where the firm had previously acted as construction manager." Two of the proposals were then downgraded because their letters of reference were from work as construction managers (at-risk) on private institutional work (non-public schools) and work as general contractors for public school systems.

The construction manager firm for which the retired superintendent worked was hired. To this parent, it seemed as if the former superintendent and the current district superintendent had manipulated the process; he felt like "the fix was in."

This example is one of the issues that ultimately hurts the school district. Patrons of the district are now suspicious of the superintendent's motives and the school board's decision-making. These concerns will simmer until questions of conflict of interest, collusion and impropriety become rampant. When the time comes for an increase in the operating levy or another bond issue, some patrons may organize to defeat additional money for the district.

General Contractor v Construction Manager, p 11

A contractor writing about construction manager–agent recently defined the method correctly as a “management method,” not a delivery method. This is a much better description because the CM-agent is acting as the owner’s representative. The CM-agent essentially becomes a “contracted” employee of the public owner. Depending on how the contract with the CM is written, the public owner pays a guaranteed percentage fee plus the actual costs of the CM services on the project.

One of the projects I analyzed called for the CM to be paid a fee equal to 4.5% of the cost of the project plus the cost of all “reimbursables,” which included the cost of personnel and support services on site. The project total budgeted cost was approximately $3 million. The CM-agent was paid $325,000 plus to manage the project. Assuming that the various trade contractors averaged an increase in price of only 15% over their normal bid numbers on the remaining $2.675 million, the extra monies paid on these contracts would be approximately $400,000. That is a total of $725,000 of the available $3 million. The school district could have hired a project engineer or construction expert and put them on salary full time for much less than that amount. In fact, in most cases, retired construction personnel would be available to act as inspector for the district on such projects.

As I have noted in earlier blogs construction manager-at-risk contracts on private work is common and is similar in many ways to general contracting. The primary advantage for private owners is that they are able to begin construction before design is complete and work with the design team to provide the owner with a personalized project at a negotiated price. Since design is not finished when work begins, the price is usually some sort of guaranteed maximum price, often with a clause to share in the savings if the project is completed for less than that GMP. The CM-at-risk has essentially the same responsibilities and liabilities as a general contractor. He contracts with the subcontractors and directs all the construction work on the project. These types of arrangements are not legal for public owners. However, the benefits of these types of arrangements are often touted as advantages to sell the public owner on construction manager-as-agent, and the public owner is taken in because he doesn’t know the difference.

One of the major points the firms selling these services use is that they can fast-track the project. This is true for CM-at-risk projects with private owners, where construction work can begin while design is still being finalized. Under Missouri law, the public owner must competitively bid all construction work, therefore, design must be complete before bidding and there is no time saving. In fact, the process of separating the work into separate bid packages under a CM-agent method takes even more time up front and the design must be extremely detailed and complete in order to avoid excessive change orders, errors and omissions.

A school board member told me recently that his district saved money on their construction work with the CM because the CM brought in a firm for one of the packages from a neighboring state where they didn’t have to pay prevailing wage. I explained that, under Missouri law, that could not happen, that the contractor from the neighboring state was required to pay prevailing wage in Missouri, and that, if he reviewed the bidding documents for the bid packages, he would see that every bidder was required to certify and submit prevailing wage documentation. If the CM allowed any of the contractors to pay less than the prevailing wage, it is possible that the school district could be held legally responsible for these violations.

Missouri public boards other than school districts have now fallen victim to the sales pitch for this construction manager-agent method. My next blog will address these issues.

General contractor v. CM, page 10

Monday, May 14, 2007 at 12:03 PM EDT

REMINDER: all these blogs' references to construction manager are to the particular form of construction management services being used on public school building construction in which the work of the project is bid by “work packages” directly to the school district.

In the previous blog, the studies quoted found that the increased costs of the construction manager system ranged from 20 to 30 percent. As I noted in earlier blogs, comparing the general contractor and construction manager types of contracting in terms of cost is like comparing apples and oranges. The increased costs are attributable to the following factors:

1. The CM does not act as general contractor but as the owner's representative, and has no role in the actual construction work.
2. The subcontractors bidding work packages directly to the school pay substantially higher bonding rates than a general contractor.
3. Subcontractors bidding work packages must cover work not normally done by their own forces, so increase their bids to cover those costs.
4. Subcontractors do not have the expertise to evaluate the entire project for construction difficulty and scheduling problems, so increase their bids to cover those costs.
5. Subcontractors often face delays and re-mobilization issues due to lack of coordination of the work.
   A subcontractor must include extra money to cover this cost.
6. Material suppliers must bid to subcontractors they may not be familiar with, so increase their bids.
7. Completion dates and liquidated damages are unenforceable under construction manager system due to multiple interdependent contracts.
8. Construction manager costs are not known. Typical costs include rentals, on-site and home office personnel costs, support costs, and miscellaneous other costs billed on a monthly basis.
9. Fewer trade contractors bid work packages due to perceived “gamesmanship” or favoritism in bid analysis.

Next blog: An analysis of comparative projects

General contractor v. CM, page 9

Friday, April 13, 2007 at 4:29 PM EDT

REMINDER: all these blogs' references to construction manager are to the particular form of construction management services being used on public school building construction in which the work of the project is bid by “work packages” directly to the school district.

The decision of whether to use a construction manager instead of the traditional design-bid-build method often is made by superintendents and school boards based on a good sales pitch from a CM firm. The methods and procedures of the construction industry are complex and not well understood by those who are outside the industry; most school officials do not even know what questions to ask. Properly writing criteria for CM proposals and evaluating such proposals is extremely difficult. Even facilities management departments of major state entities have difficulty developing evaluation criteria that does not deteriorate into subjective "popularity contest" selection.

There are few studies of the costs of similar construction management methods for public construction, primarily because the method is rarely used, though other types of construction management have been used. Such studies were done on the effects of New York State's "Wick Law." The Wicks Law mandated that public bodies in New York issue multiple construction contracts on public projects exceeding $50,000. These multiple prime contracts required that electrical, plumbing and HVAC be separate contracts, with a fourth prime contract to a general contractor for the remainder of the work. In addition to numerous problems with coordination of the work, increased change orders, disputes and delays, the New York School Boards Association in 1991 issued an impact statement estimating that the Wicks mandate increased costs from 20 to 30 percent. A study by the New York State Division of Budget in May, 1987 found that the Wicks Law increased construction costs on a variety of public buildings by 24 to 30 percent. [Note: This information comes from the American Council of Engineering Companies of New York.]

If the costs increased that much with only four prime contractors on a project, it makes sense that even more prime contractors would increase the costs at least as much if not more.

More on cost comparisons in my next blog.

General contractor v. CM, page 8

Sunday, April 01, 2007 at 5:04 PM EDT

REMINDER: all these blogs' references to construction manager are to the particular form of construction management services being used on public school building construction in which the work of the project is bid by “work packages” directly to the school district.

If the school district is using a construction manager, the CM will first establish an office at the site of the project, and will begin the paperwork trail of shop drawings, submittals, etc. This process will be similar to that of the general contractor, with crosschecks and approvals tracked. Subcontractors for site work and underground utilities will be called to the site, and work will begin. Each subcontractor from this point on will rely on the previous subcontractor to have done his work correctly. If there are errors to be corrected at any point, any subcontractor who was scheduled to follow may have a claim for delay and extra work. Many things can go wrong and must be handled by the school district. A few are listed below.

A common error is missed rebar dowels from the footing into block walls at the correct spacing. When this happens, the remedy is usually drilling holes in the footing, inserting the correct rebar at the proper spacing, and epoxying it in place. This leads to extra costs for the subcontractor in terms of both material and labor. Depending on the extent and size of the project, the masonry subcontractor may have a claim for delay and/or re-mobilization.

If a subcontractor is scheduled to arrive with his work forces on a certain day, and is not able to work due to something that occurred before, or there is not enough work area for his crew due to poor scheduling of the work, he may have a claim for delay and/or re-mobilization.

If a subcontractor has developed a cash flow problem, whether on this job or another job he is contracted to do, he may be unable to get materials delivered, or may no longer be able to hire adequate workmen to do the project. His contract is with the school district, and he is in default. Under the construction manager system, the school district must find an answer, first notifying the bonding company used by the subcontractor, and then working with the bonding company to find another subcontractor to take over the contract. In the meantime, claims by the rest of the subcontractors affected are piling up and the work is not proceeding. Even if the CM had proposed a scheduled date of completion, no such date has any validity for any subcontractor and penalties cannot be imposed.

All school districts are required in Missouri to assure that workers are paid the "prevailing wage" for their county. There is at present a $10.00 per day per workman penalty, in addition to back wages, for failure to pay this wage rate. Under the CM system, the school district is the next responsible party if a subcontractor does not pay.

All claims are the responsibility of the school district; the construction manager is only the paper pusher acting on behalf of the public owner. By law, the construction manager has only contracted with the owner to furnish his "skill and judgment in cooperation with, and reliance upon, the services of the project architect or engineer." (Missouri Statute Chapter 8, Section 8.683).

If a general contractor had been chosen by competitive bidding, all of the above responsibilities and costs would have fallen to that contractor, and the school district would still be on track to completion by the scheduled date. The school district could have specified a completion date and daily damage amount in the contract with the general contractor. This is not an option under the CM method.

Next: what does each method really cost?

General contractor v. CM, page 7

Saturday, March 24, 2007 at 3:36 PM EDT

REMINDER: all these blogs' references to construction manager are to the particular form of construction management services being used on public school building construction in which the work of the project is bid by “work packages” directly to the school district.

If the school district has done its homework and bid its construction project to a general contractor, it has signed a contract and its design team will oversee the project as part of its fee... Work begins with the general contractor doing all preliminary steps, including writing subcontracts, compiling shop drawings and material submittals, installing its project superintendent on site, and making all necessary preparation of the site such as utilities, access roads and gates, fencing and other construction barriers, construction waste disposal, safety barriers, and other items that precede actual work. The general contractor will prepare a firm schedule of work based on his plan to complete the project during established time frame. He will have analyzed the work and determined where and when he needs each subcontractor's forces. He will then keep the subcontractors aware of and committed to the schedule for all phases of the work. If a subcontractor fails to supply workers on time, or make errors in his work, the general contractor will have procedures for dealing with it. Questions that arise during construction will be directly through the contractor, then to the design team. Only if there are extra costs or non-construction questions do questions have to be handled by the school district.

When the school district has employed a construction manager, someone will have to determine whose responsibility each of the preliminary site preparations belong to. In some cases, the construction manager may have a contract with the school board that calls these items "reimbursables." The school district will not know in advance what the cost for these items will be. The CM might hire an outside firm to provide these services, might do them with its own or related forces (though this violates the state law it is difficult to prove), or might have included some of these items in the "work packages." If in the work packages, there is often conflict between the subcontractors as to who is responsible for which portions, and the CM tends to log and accumulate extra charges as the project proceeds. Subcontractors do not like to get charged for someone else's trash cleanup or utility usage, so these issues often come back to the school district at the end of the job when final payment is due. Subcontractors who feel they have been taken advantage of by the CM will not bid again. The only thing that usually avoids legal action in these cases is that the amounts are small.

More on building under a CM later.

General contractor v. CM, page 6

Tuesday, March 20, 2007 at 5:22 PM EDT

REMINDER: all these blogs' references to construction manager are to the particular form of construction management services being used on public school building construction in which the work of the project is bid by “work packages” directly to the school district.

With the general contractor method, the Specifications for the project prepared by the design firm include a contract form, typically an AIA form, which the general contractor has essentially agreed to when he bids the work. The contract will either specify the number of working days or actual date for completion that was required by the Specifications prior to bid. The pertinent information and contract amount are filled in, the contracts are signed by the school district and work proceeds. Any contracts with subcontractors and material suppliers are between those firms and the general contractor; the school district does not need to involve itself. If a subcontractor defaults, that becomes the general contractor’s problem, and he proceeds with the work as the contract requires...

With the CM method, each work package must be negotiated with each subcontractor. While the CM may use a standard AIA contract form, the detailed description of the work package under each must be accurate and complete to cover the entire project and related correctly to the other work packages. The CM may try to include a time frame or duration for the work of each subcontractor, but each subcontractor’s work is affected by the previous work of another subcontractor. Any specified time frame or duration of the project therefore becomes only the CM’s estimate, and is not legally enforceable. The CM does not sign the contracts, and has no legal or financial responsibility for the terms of any contracts other than his CM agreement with the school board. Each contract is signed directly with the school board. Any disputes between subcontractors for delays caused by another subcontractor, for missed or overlapping items, etc. become the direct responsibility of the school district. The CM is there to mediate, but is not responsible if claims are made for extra costs, court or mediation fees, and such. If a subcontractor defaults after signing a contract, eventually the performance and payment bond would kick in and cover the costs, but the delays while the bonding company finds another company to do the work and to purchase materials will not only affect that work package, but all the others. Each subcontractor will then have a claim for delays and extra costs.

Next - Building the project, General v. CM

General contractor v. CM, page 5

Friday, March 16, 2007 at 11:25 PM EDT

REMINDER: all these blogs' references to construction manager are to the particular form of construction management services being used on public school building construction in which the work of the project is bid by “work packages” directly to the school district.

The school's project has been advertised for bids and a date and time for opening of the bids have been accepted.

Under the traditional design-bid-build method, general contractors deliver their complete bid documents, along with bid bond and qualifications, to the school board. The bids are opened publicly and, if no errors or discrepancies are in evidence and the bids are within budget, the school board meets with the architectural firm and awards the contract to the lowest bidder. A contract is signed and construction begins.

Under the construction management method, subcontractors bid multiple work packages on the date and time set for the opening of bids. Subcontractors may submit bids for a single work package or multiple work packages, with bid bonds to cover the amount of work being bid. When the bids are opened, it is not immediately apparent which subcontractors are the low bidders on the work, as the overlapping bid packages will have to be analyzed. Also, some work packages may have only one bidder, while others may have several. The lowest bidder on one work package may not be the lowest bidder if another bidder has combined that work package with other work packages. Work packages that are combined may or may not break out the separate work packages, and a subcontractor may refuse to do only one work package when he has submitted a combined bid.

When a work package has only one bidder, the project is typically not rebid, as it would be if there were only one general contractor bidding. Instead, the construction manager "analyzes the bids" and decides which subcontractors to offer contracts on behalf of the school district. This system gives the construction manager a great deal of leverage to select favorites among the subcontractors. Those subcontractors who have bid one work package, were lowest bidder on that work package, yet lost the contract due to "gamesmanship" with multiple work packages refuse to bid again on this type of contract, reducing the pool of bidders even further.

If there is no bid for a particular work package, the school district has additional decisions to make. Will it allow the construction manager to select a subcontractor from among those bidding and make this work a change order; will they rebid just that work package, what other options are there? In practice, this rarely happens, because the CM knows in advance which work packages are likely not to be bid, and usually which subcontractors are bidding which packages. In today's market, very few construction firms exist as only one entity. In practice, one of the CM's “related" or "friendly" firms will bid multiple bid packages to be sure that everything is covered. This is one reason that many subcontractors avoid bidding public projects under this type of management.

Next: the contracts and the work.