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Managing Construction Risks

Presented by:

Robert C. Epstein Greenberg Traurig, LLP Co-Chair, National Construction Group epsteinr@gtlaw.com 973.360.7945

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Successful Construction Projects

On time

On budget

Without defects in design or construction

With minimum conflict among the project parties

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Owner• Government Entity

• Developer

• Public/Private Company

Govt AgenciesFed/State/Local

E.&O.Insurance Co.

E.&O.Insurance Co.

ConstructionManager• At Risk• Not At Risk

• Architect

• Engineer

• Consultants

E.&O.Ins Co.

CGLIns Co.

Subconsultants

SuppliersSubcontractorsCGLInsurance Co.

CGLInsurance Co.

Investor

Lender

Surety

GeneralContractor(Or Multiple Primes)

Construction Project Relationships

1st PartyInsurance Co.

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Principal Construction Risks

Risk No. 1: The project as designed costs too much

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Risk No. 1: The project as designed costs too much

[N]either the Architect nor the Owner has control over the cost of labor, materials, or equipment, over the Contractor’s methods of determining bid prices, or over competitive bidding market or negotiation conditions. Accordingly, the Architect cannot and does not warrant or represent that bids or negotiated prices will not vary from the Owner’s Project budget or from any estimate of Construction Cost or evaluation prepared or agreed to by the Architect.

AIA Form B141 (1987) Standard Form Agreement Between Owner and Architect

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Risk No. 1: The project as designed costs too much

Owner involved in design process

Establish a budget

Define the project

Independent cost estimates as design progresses

Add and delete alternatives

Redesign at no cost

Peer review of design

Preconstruction services

BIM

Addressing the Risk

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Principal Construction Risks

Risk No.2: Defects, Failures And Non-Conformities

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What Are Construction Defects?

Deviations from plans and specifications

Functional defects Failure to meet performance criteria Any element of project does not work properly, or

at all Sudden failures

Code violations Diminished useful life Unreasonably high risk of failure Unreasonably high expense to operate Aesthetics

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Typical Causes Of Construction Defects

Design does not work

Poor detailing and drafting

Defective materials

Substitution of inferior materials

Poor workmanship

Deficient inspections

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Owner Recourse Against Designer for Construction Defects

Professional negligence or breach of contract

Liability limitations in professional services contract

Sufficient funds or insurance

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Professional Liability Insurance

Claims made policies

Defense costs reduce coverage

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Owner Recourse Against Contractor For Construction Defects

Commercial General Liability Insurance Covers claims arising from “bodily injury” or

“property damage” caused by an “occurrence” during the policy period, if not excluded from coverage

Business risk exclusion

CGL Insurance “…does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident”

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Builders Risk Insurance

Covers risk of loss/damage to construction work during the construction process

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Principal Construction Risks

Risk No. 3: The Project Site Makes The Project More Difficult Conditions of site, soils or subsurface that

the Owner did not disclose and which the contractor could not reasonably have discovered or anticipated itself

Addressing the Risk

Specific disclaimer

Risk sharing

No damages for delay clause

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Principal Construction Risks

Risk No. 4: Project Completion Is Delayed Causes of project delay

Incomplete, inaccurate or poorly coordinated designs

Unforeseen site conditions

Design revisions

Force majeur

Other causes

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Injury To Owner From Delay

Lost product revenues

Lost rentals

Lost use of facility

Liability to contractor for delay damages

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Contractor Delay Damages

Extended equipment rental

Standing by with idle employees

Labor rate escalation

Materials cost escalation

Forced work in winter

Acceleration costs

Inefficiency costs

Additional overhead

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Project Completion is Delayed

Owner’s pre-construction planning Assure permits are in place

Review design for errors/constructability

Geotechnical studies

No damages for delay clause

Close project supervision

BIM

Addressing the Risk

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Primary Considerations for all Construction Projects:

Project delivery format Project management/oversight Pricing/cost methodology Programming and design Development of a project budget and

cost estimation Scheduling Trade procurement Payment disputes and liens Project team coordination Insurance and bonding Completion assurances and remedies Project close-out

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Typical Construction ContractProvisions Allocating Risks Indemnity Insurance and bonding Waiver of Consequential Damages Scheduling commitments Liquidated Damages Pricing Commitments Design standards Hazardous conditions Unforeseen conditions Defects Changes Constructability Project team coordination and cooperation Warranty provisions Performance defaults Budget contingencies Intellectual Property Rights