Construction Management from an Owner’s POV

| June 11, 2015 | 0 Comments

by Girard R. Visconti, Esquire

“Construction Management” has evolved into the private sector and oftentimes replaces the traditional concept of a lump sum contract between the owner and the contractor.  Construction management has taken on a serious role in public works contracts, especially with state agencies and in the private sector.

Construction management could be defined as a consultant to an owner at one extreme, and to the actual contractor to the owner on the other extreme.  The “New England” concept of “construction manager” is, in effect, the actual contractor who enters into a contract with the owner to build a project.

The traditional concept of construction is where the owner hires an architect who designs a project, and thereafter, the project is placed for bid with several contractors.  The lowest, responsible and qualified bidder usually receives the award.

Construction management has taken away the bidding process in that the owner hires an architect and the construction manager (“CM”) at the same time with no competitive bidding by contractors (the public sector requires prequalification and competitive bidding).  The owner, architect, and the CM are a “team” who attempt to work together to design a project, and once a project is designed, the CM is the actual contractor for the project.

On many occasions, the CM gives the owner a guaranteed maximum price (“GMP”) when the drawings are not complete, as opposed to the traditional method of a contractor bidding on 100% completed drawings and specifications.  The CM would be responsible for any cost overruns over the GMP.  If the cost is below the GMP, such savings belong to the owner.

Thus, the CM actually constructs a project on a “cost plus” basis with a GMP.  The $64,000 question is, should an owner use a CM, or utilize the traditional form of construction whereby the architect completes the drawings and specifications, and the documents are placed out to bid with several bidders on a lump sum basis?

From the owner’s point of view, it may be practical to utilize a team approach by retaining an architect and a CM at the outset of the project where the owner, architect, and the CM make decisions together and participate in the design aspect of the project as a team, including determination of cost analysis, determination of materials and different utilization of construction methods and means.

If an owner wishes to build a project “in a hurry,” for example, 4 to 8 months, the traditional method would be very difficult to utilize since there is no time for the architect to draft his design documents and place the project out to bid.

Construction management can be divided into two different definitions:  (1) the owner could utilize a CM as the owner’s consultant, including “clerk of the works”.  Oftentimes an owner is without a responsible and experienced staff to determine construction means and methods, to participate in the actual construction project, reviewing the architect and contractor’s work product, etc.  Therefore, on occasion, the owner can make a good investment by retaining a CM to represent the owner during a construction project.  In such a case, the CM does not actually participate in the construction, but merely represents the owner’s interests in the project.(2) The other definition of construction management is where an owner retains a CM who actually builds the construction project for the owner.  It is this author’s opinion that construction management can be beneficial on two occasions:  (1) in representing the owner’s interest in the construction project simultaneously with the retention of an architect to determine the construction means, methods, feasibility, cost studies, etc., and also to represent the owner during the construction phase of the project; or (2) when there is no time to retain an architect to draw up plans and specifications and place the project out to bid.  In the second case, the CM actually becomes the contractor.  In such a situation, the owner still needs substantial representation to protect its own interests.  If the owner does not have in-house, professional help, it may be wise for the owner to retain one or more persons to oversee construction from the owner’s point of view.  (This representation is commonly known as “clerk of the works”.)

From a consulting point of view, a CM can advise the owner as to the project site, alternate designs, sequencing of construction, materials, scheduling, cost analysis and budgets, long-lead procurement items, recommendations as to construction, labor matters, value engineering (cost savings), accounting systems, contract document input, review of design and scope divisions with the architect, bid package identification, bidding negotiation, contract award, inspection of work, review of progress of payments, change orders (vs. in scope work), project close-out services, coordination of owner-purchased materials, etc.

As noted above, unless there is no time for the traditional architectural design of specs and drawings, an owner should not retain a CM to actually build the project, but should rely on the traditional concept of construction by retaining an architect and placing the project out for bid to several contractors.  (A suggestion:  An owner hires a construction manager for preconstruction services.  Thereafter, the CM gives the owner a guaranteed maximum price with the owner bidding out the project to other contractors to compare the lump sum versus the guaranteed maximum price).

IN THE EVENT THAT THE CM IS USED AS THE EXCEPTION RATHER THAN THE RULES, THIS AUTHOR HAS SEVERAL SUGGESTIONS:

1.All sub-trade items, including self-performed work by the CM, should be competitively bid by the CM with sealed file bids being opened in the presence of the CM, the architect and the owner.  This method guarantees that the GMP will be efficiently utilized.  Any work done by the CM (self-performed work) should also be subject to competitive bidding.

2.An audit provision should be placed in the contract between the owner and the CM.  A construction management contract with a GMP is nothing more than a cost-plus contract not to exceed a certain price (GMP).  At the end of the project, the owner is entitled to an audit of all costs and expenses and should include general conditions of the CM and any and all costs expended by the CM under the contract.  The CM usually submits applications for payments to the owner based on the cost of the work performed on a monthly basis.  The CM submits his costs for that period, plus a fee. (Note: It is extremely difficult to audit the cost of the work based on time and expense)

3.The owner should never agree to a contingency fund as requested by CM’s.  Many contracts have no definitions of contingency funds, and most CM’s take the position that contingency funds are for the contractor’s use. If the contingency fund is utilized there must be a well defined “definition” of the use of the monies.

4.Cost of the work in a CM contract should be clearly defined and costs not to be reimbursed should likewise be defined.

5.A CM contract should always be based on drawings that are 100% complete, if practical.  Some projects must be performed “in a hurry,” and therefore, the CM usually gives a GMP on drawings that are not 100% complete.  In such cases, it is imperative that the owner, with the assistance of its architect and other consultants, determine whether or not a change order is in scope or out of scope.  If the requested extra is within scope, a change order should not be approved by the owner since the CM guarantees its price based on incomplete drawings and should know that certain items are included in the traditional scope of work for a certain project.  Authorized change orders should either increase the GMP when there is an additional scope, or decrease the GMP when there is a deduction in scope.  (Suggestion:  A GMP should be given to the owner when drawings and specifications are at least 80% complete).

6.General conditions may be subject to audit or could be agreed upon in a lump sum percentage without audit.  (For example, 3%-4% of construction costs to be paid to the CM for general conditions not subject to audit.)  (A “matrix” should be used to define General Conditions to avoid overlapping with direct costs).

7.Construction management forms.  There are a variety of construction management forms to be utilized between the owner and the CM.  The traditional form is the AIA A133. The AGC also has document No. 8 which is the Standard Form of Agreement Between the Owner and the Construction Manager.

The AIA document is bare bones and fails in a complete document to protect the owner with the CM.  On the other hand, the AGC document No. 8 is a substantial document, but this document favors the CM.  The agreement between the owner and the architect (when using the AIA-A133 with the CM) is the Agreement Between Owner and Architect entitled AIA Document B103/CM.  General Conditions AIA A201 are utilized with the AIA A133.

Conclusion

It is this author’s recommendation that an owner should not utilize the CM method to build a project except where there is no time to develop plans and specifications by an architect and place the project out to bid or as a construction consultant to the owner.  With today’s state-of-the-art, an architect can be retained by an owner, and 100% of construction drawings and specifications can be developed in 4 months, providing the owner has a construction program and budget.  At the end of the 4-month period, plans and specifications can be advertised for bid, a contract awarded to the lowest, responsible, qualified bidder within 4 to 6 weeks from the completion of contract documents and bid package preparation by the architect.  The traditional method will thus save many conflicts, accounting, determinations, and other disadvantages noted in this article.  In the event there is little time to utilize the traditional concept of construction, then the CM should be utilized with the caveats and suggestions also mentioned in this article.

In any event, a wise owner should always have professional staff who are experienced in construction to act as the owner’s consultant or clerk of the works on any construction project.  Lacking this staff requirement, an owner should invest in a construction consultant (e.g. CM) to be brought in to the construction process early in the game to represent the owner with the architect, and ultimately the contractor, in overseeing the project.

 

Girard R. Visconti is a Partner of Shechtman Halperin Savage, LLP in Pawtucket, Rhode Island.

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