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This feature is a part of “The Dotted Line” series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
The way big construction projects get done continues to evolve. Public projects used to happen via traditional design-bid-build, but today, many states and jurisdictions increasingly allow a range of delivery methods, such as construction manager at risk.
That flexibility brings benefits — and potential perils — for contractors.
Unlike in traditional design-bid-build, where the design and building processes are separate and sequential, the CMAR method requires the construction manager and design team to work simultaneously and collaborate early in the design process.
Once the design is ready for bids, the owner and the construction team — often the same construction manager — enter into a contract, which typically sets a maximum cost for the project and puts much of the risk onto the construction manager, said James Strommen, of-counsel at Minneapolis-based law firm Kennedy & Graven.
James Strommen
Permission granted by James Strommen
“I think the belief is from the construction manager side, that they have much greater control over their subcontractors, and can — because they have taken the CM risk — really watch and supervise their subcontractors to keep the price at the guaranteed maximum price, which of course then benefits the owner [because] there’s not constant change orders,” said Strommen.
The federal government began using CMAR and states followed suit to speed up projects and more effectively manage complex builds, said David Pugh, partner at Birmingham, Alabama-based law firm Bradley.
Today, private entities increasingly finance public infrastructure, and states that are the most liberal in their use of alternative delivery methods also tend to be those aggressively pursuing public-private partnerships, said Pugh.
“For those projects to work, to be able to attract the private capital to those projects, you’ve got to have alternative delivery methods available,” Pugh said. “Private capital doesn’t want to use the traditional design-bid-build method — too slow, too expensive, too little control.”
There are many different ways to set up CMAR contracts, from different fee structures to the number of GMPs associated with the project, said Mark Evans, partner at Columbus, Ohio-based law firm Bricker Graydon. For example, sometimes it makes sense to add an early site package GMP so earthwork and utility work can get underway while the design is being finalized.
David Pugh
Courtesy of Associated Builders and Contractors
“[CMAR] is definitely not a one-size-fit-all, which is good for the owner too, because they can customize it to fit their project and their needs. Whereas a hard bid, it’s just a straight mechanical process,” said Evans.
Fewer conflicts
That shift away from the traditional design-bid-build method has seemingly contributed to fewer lawsuits from rejected bidders, since owners have a great deal of discretion in choosing their team, said Evans.
“In a bidding context, we used to have a lot of challenges to awards, where, you know, a bitter, disgruntled vendor, who was maybe the second lowest bidder, would challenge the debt award and try to get it returned. I have seen very few, if any, challenges of an award in a CMAR or a design-build context,” said Evans.
That greater level of communication on CMAR projects can also help reduce conflict between parties on the project, according to Strommen.
“The argument over whether you should have seen it in the design or not, now it’s going to cost more — I think those are ideally reduced dramatically on the CM at risk,” Strommen said. “Every owner would like that, because they have a budget and they want to stay in the budget.”
No project is without challenges, but the CMAR process opens up opportunities to head off potential conflict and make sure the project will get done in a way that’s mutually beneficial. Typically contractors can submit proposed changes to the agreement and negotiate with the owner, according to Evans. That is a key window for contractors to develop a contract that works well for them.
“Contractors really want to be very active on the front end and really dive into these contract terms, in the procurement phase if they have that opportunity, and really make sure the terms are not shifting too much risk on them,” said Evans.
CMAR contract strategies
One area for contractors to negotiate is the contingency, a bucket of money set aside to correct unforeseen problems that arise on the job. The contract defines what it can be used for and when it can be accessed. For example, CMARs may want to push to be able to use that money to fix an issue where they’re at fault, rather than just correcting damage by a third party.
“Another use of contingency that contractors typically would want to have access to is, if they are behind schedule, they can use contingency to accelerate the work to get back on schedule,” said Evans. “What that would look like is either bringing on additional labor or paying overtime hours to the guys that are already on the site.”
While price volatility has been much reduced, lingering COVID-19 impacts are creating extremely long lead times for switchgears for electrical systems, generators, some HVAC equipment and heat exchangers, according to Evans.
Given these supply chain difficulties, CMARs would want to push to get an extension for unforeseeable, material delays in their excusable delays provisions of their contract, Evans said. An owner may agree to order materials in advance before the main CMAR is ready, a practice which, while common, means they’re out that money if the project later falls apart.
“It’s a risk to the owner, but I think it’s pretty unavoidable right now just based on the current status of supply chain issues,” said Evans.
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