On October 3, Governor Jerry Brown signed into law Senate Bill 328 which permits counties to enter construction manager at-risk agreements for construction of projects over $1 million. Counties now join the University of California, the California State University System, the Administrative Office of the Courts and other public entities which already have enabling legislation permitting them to enter CMAR agreements, potentially reducing their risk in public sector projects.
CMAR has become a popular project delivery method in the public sector as an alternative to the design-bid-build method. The DBB method is generally considered riskier for public owners than other delivery methods. General contractors on DBB projects have no design involvement and are thus less familiar with the design, have relatively little time within which to prepare competitive bids and will only be awarded a contract if their bid is the lowest responsive bid. A general contractor pursuing a DBB project is more likely to make claims under these circumstances.
Whether the owner or the CM is truly “at risk” depends largely upon who is in contract with the trade contractors. Sometimes the owner enters into contracts with the trade contractors and does not assign those contracts to the CM. This is risky for the owner because it may have direct liability to one or more of those trade contractors for the CM’s failure to manage them. Although an owner would have a right of indemnity against the CM under these circumstances, an owner does not have this potential liability to trade contractors under a DBB procurement – the general contractor does.
Sometimes the CM contracts with the trade contractors, or takes an assignment of the trade contracts from the owner, either of which is better for the owners since the CM carries the potential liability to the trade contractors for its failure to manage them. The CM may also be “at risk” if it guarantees the cost of construction or the schedule. If the CM is in contract with the trade contractors, and if the CM is also “at risk” regarding cost and schedule, a public works project has a better risk profile for the owner than a DBB project. The CM does not engage in a bidding strategy that is dependent on future claims. Also, the design may be better and project costs lower because of the CM’s involvement in its development.
In the absence of enabling legislation such as SB 328, there are risks to CMAR contracting for both owners and CMs on public projects. As a general matter, many public owners are required to competitively bid construction contracts and award them to the lowest responsive, responsible bidder. However, public owners are not required to award design and construction management agreements to the lowest responsive and responsible bidder. They can award based upon an assessment of best value, with price being one of the considerations. Risk arises when a CMAR agreement is entered into without statutory authority.
In 1970, the City of Inglewood and Los Angeles County created a joint powers authority to develop a civic center that would include both city and county buildings. The joint powers authority awarded a construction management contract to Swinerton & Walberg Co., which wasn’t the lowest bidder but was considered more qualified. Under the terms of the contract, Swinerton guaranteed the total cost of construction. The low bidder, which was not found to be non-responsible, successfully enjoined the joint powers authority from proceeding with Swinerton’s agreement.
In 1972 the California Supreme Court ruled in City of Inglewood – L.A. County Civic center Authority v. Superior Court, 7 Cal.3d 861 (1972) that a CM contract that guarantees the total price of a project based on subcontractor bids “is too closely akin to traditional lump sum general construction contracting” to be exempt from competitive bidding requirements. Since that time, any public entity required to competitively bid construction contracts that entered into a CMAR agreement ran a substantial risk of having its project enjoined and having the agreement ruled void. The CMAR risked having to disgorge all funds paid to it by the public owner.
With the enactment of SB 328, California counties and CMs entering CMAR agreements with them can now avoid this risk and enjoy the benefits of CMAR. However, they must carefully allocate between themselves the risk of liability to the trade contractors.
When selecting a CM to be “at risk,” a public owner is well advised to consider the CM’s experience. If the CM is a general contractor it is likely experienced in managing trade contractors because this is what general contractors do. However, a public owner can be at greater risk if it holds the trade contracts and relies on a “pure” (agency) CM that may not be as experienced in managing trade contractors because it may have relied upon general contractors to do this.
Jeffrey A. Sykes is a construction partner in Farella Braun + Martel’s San Francisco office. He can be reached at firstname.lastname@example.org