WPublic Owners, like cities, counties and school districts, do not build buildings the way they used to. For more than fifty years, the process of constructing public works was simple – a public works department would put a project out to bid and the general contractor with the lowest bid would get the job. While this process is still used on many projects, more and more Public Owners are looking for new solutions. The process does not work for Public Owners anymore, for two reasons. First, few cities, and almost no school districts, have in-house construction expertise. California voters have provided school districts with billions of dollars in bonds, but the way in which those funds can be used is very limited. The Public Owners do not have the budget to hire in-house staff to manage and oversee complex construction projects. The potential for losing control of prime contractors where an Owner does not have its own strong construction expertise is huge. Second, Public Owners are frustrated about having to turn the project over to the lowest priced general contractor, when that contractor will often have a history of claims and a marginal record on scheduling and quality. While the low bidder can be passed over if it is “not responsible,” the standard of finding a contractor “not responsible” is a high one, and the public entity has no ability to go on to another bidder who is much better, although its price is only a little higher.

Construction Managers can provide the answers to both of these problems. A school district with $50 million in bond funds does not need to rely on their already over-stressed staff budget by adding in-house construction expertise. They can use the project-specific bond funds to create a superb team of highly experienced construction expertise to oversee the bid. They can select an all-star cast with an excellent success record, while there is no way that they could have hired that kind of talent for a two-year building program.

Getting stuck with an undesirable low-bid general contractor is handled even more neatly. General contractors are selected under a Public Contracts Code section that requires award to the low bidder. Construction Managers are selected under a section of the Government Code which gives the Owner the right to negotiate with the Best Qualified Firm. The benefit of the second method is obvious.
Having negotiated a fair and reasonable price with the Best Qualified Firm, the Public Owner can still obtain the benefits of competitive bidding because the individual trade contract packages (like concrete, electrical, plumbing, painting, etc.) are competitively bid.

Selecting the Right Construction Management Model for Multi-Prime Contracts: CM/Administrator vs. CM/Builder

The first wide-spread use of construction managers involved owners who used the conventional “general contractor” model, but hired a professional construction manager whose principal task was defending the owner against claims by the low-bid general contractor. Like the old West battles between the sheep herders and cattle ranches, owners responded to bad experiences with claims-oriented contractors by bringing in administrative hired guns to battle contractor’s claims. These CM’s viewed their job to consist of defending against change orders, whether they were meritorious or not, and creating possible claims against the contractor that could be used to neutralize contractor’s claims at the end of the project. There may be projects where this model provided protection to defenseless owners, but many owners discovered that this model created a relentless adversarial relationship between the owner and the contractor. Litigation costs often exceeded any theoretical cost savings on change orders.

More recently, owners have sought construction managers who viewed their job as anticipating problems and avoiding them. One of the biggest benefits that a Construction Manager brings to the construction process is its “pre-construction services.” A project is designed by architects and engineers, but the plans and specifications, which the architect thinks are clear are often confusing to the contractors and subcontractors bidding on a project. During the pre-construction phase, a Construction Manager, using its own construction expertise, can review the plans and identify missing detail, inconsistency between the work of design subconsultants, like the structural engineer and the electrical engineer, and identify areas which need to be clarified to avoid change order claims in the future. The skill required for these pre-construction services is real construction experience rather than administrative claims management. This type of pre-construction service is almost always money well spent.

When problems do arise during a project, the newer breed of construction manager/builder attempts to assist in resolving the problem, instead of building a case that blames another party. As a result the money lost by the owner and contractor is greatly reduced, and the opportunity for a reasonable resolution is much higher.

The wrong type of construction manager can also be a disadvantage with the CM/Multi-Prime Contract approach. Trade Contractors are required to provide payment and performance bonds, and the unavailability of bonds may limit the number of subcontractors who are interested in the project. This problem can be mitigated by a Construction Manager with strong contracts with the subcontractor community, and an aggressive subcontractor outreach program.

Selecting the Right Construction Management Model for Multi-Prime Contracts: CM at Risk or CM as Owner’s Advisor

There is another major decision that needs to be made in selecting Construction Managers. The issue is that the Public Owner needs to decide whether to use a Construction Manager “CM-As-Owner’s-Agent” or a “CM-At-Risk.”
The CM-At-Risk is superficially attractive to Public Owners. Under this arrangement, the Public Owner uses the relevant Government Code sections to select the Best Qualified Construction Manager. The individual trade contracts are then put out to bid. The Construction Manager, like a General Contractor on a conventional project, then gives the Owner a guarantee of price and time. The price is usually calculated as the General Contractor’s fee and expense, plus the total of Trade Contractor bids, plus an agreed amount for contingency. Sometimes the trade contracts are assigned to the General Contract, and sometimes they are not. If the trade contracts are going to be assigned to the CM-At-Risk, the Public Owner risks losing the interest of highly-qualified Construction Managers who also perform work as Union General Contractors. Many Union General Contractors are signatory to the Carpenters, Laborers and Operating Engineers Unions. Under the union agreements signed by most union General Contractors, if they enter into a contract with a non-Union subcontractor in a trade to which they are signatory, they become responsible for paying the Union benefits for the non-Union contractors in that trade. Many public entities also are uncomfortable that using a CM-At-Risk with an assignment of the trade contracts to the Construction Manager looks like a transparent attempt to avoid the competitive bid process. Even if a CM-At-Risk format is used, it is often a better policy not to include assignments of the trade contracts.

Moreover, no matter how superficially attractive the concept of “CM-At-Risk” is, it has a huge hidden cost – the CM-At-Risk structure creates a potential conflict of interest between the CM and the Owner. A CM-At-Risk has only one motive in deciding whether to recommend approval of a time extension or change order requested by a Trade Contractor – the best interest of the Public Owner. A CM-As-Agent functions like an employee of the Public Owner to guard the Owner against non-meritorious claims, but to recommend payment of valid claims. The failure to pay valid claims is often a significant factor in producing slow performance and claims on a project. A CM-At-Risk, on the other hand, takes the risk of cost and time overruns so the CM can be motivated to recommend approval of a time extension or a change order in order to avoid its own exposure. An ancient Latin expression is “Cui costodient costodiens” or “who guards the guards?” If you have put the Construction Manager in a situation where it has the same risks as a general contractor, do you then need to hire a second Construction Manager to perform the role as “CM-As-Agent” to act purely in the Owner’s best interest and objectively review the recommendations? For years, Public Owners have been hiring Construction Managers in situations where there are general contractors to avoid this very problem. Using a CM-As-Agent in a Multi-Prime situation permits the Owner to incur only one set of CM-General Contractor fees.
So how does a Public Owner obtain assurance from the contractor that the CM-As-Agent is going to perform the pre-construction and construction services that will make the project come in on time and on budget? The answer to that question was provided years ago by Patrick Henry in his famous “Give Me Liberty or Give Me Death” speech. He said, “I know no way to judge the future, except by looking at the past.” The statute that allows the Public Owner to employ Construction Managers, allows the Public Owner to select the Best Qualified Firm. Look at the CM’s history of satisfaction of its clients. There is no substitute for “Due Diligence.” It is also important that a public entity avoid “bate and switch” situations. Often Construction Managers use their “A-Team” for the “beauty contest” while the public entity is trying to decide which is the Best Qualified Firm. The actual staff assigned to the project, however, may be much more junior personnel without the requisite experience. Prudent Public Owners also require Errors & Omissions insurance to cover delay or cost overruns as a result of the Construction Manager’s negligence. CMs, whether Owner’s Agents or At-Risk remain liable for their own negligence.

The Right Use of CM’s Where There Is No General Contractor
For Public Owners whose budgetary restraints prevent them from having in-house construction expertise to oversee complex building projects, use of a professional Construction Manager with competitively bid trade contracts offers an excellent option. Instead of paying a double fee for a conventional general contractor and a CM to overlay on the process to guard against general contractor’s claims, the Owner pays one fee to the CM. While use of a CM-At-Risk is initially attractive to Owners, the inherent creation of a potential conflict of interest typically makes CM-As-Agent a better choice. It also avoids the appearance that the public entity has used a questionable tactic to have a negotiated prime contract. Most importantly, the Owner needs to select a construction manager (and CM project team) that has real building experience. Owners have often wished that the skill and experience of the general contractor could be moved to the Owner’s side of the table and placed at the Owner’s service in a relationship devoid of suspicion, controversy and tension. The use of the right CM who is not at risk in a multi-prime model can provide those benefits.

Frank Hughes and Chris Hersey are partners at Miller Morton. They collectively have over 35 years of construction transaction and litigation experience. Originally published in Commercial Building Edge Magazine, Northern California Edition, September 2005.

(c) Copyright 2006 Miller, Morton, Caillat & Nevis. All rights reserved.
The information provided here is intended to educate the reader regarding issues of contemporary business interest. It is not intended to constitute legal advice or recommendations for application to any specific legal dispute. You should always confer with your legal counsel about the application of the principals and issues discussed to your own circumstances.