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. 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?