Construction Law Insider
Construction contract strategies for Owners and Developers.
Defining the Role of the Construction Manager
A construction manager (CM) is, essentially, a firm of experienced construction professionals (but not necessarily licensed professionals such as architects or engineers) which assists a project owner in executing the design and construction of the project, with the goal of reducing time and cost, but while maintaining the quality of the work. The financial and legal relationship between the owner and the CM, which can vary widely from project to project, allocates these three major risks, that is, time, cost and quality of the work, between the owner and the CM.
The CM can serve either as an advisor or constructor to the owner. As an advisor, the owner holds the subcontracts and there is virtually no risk on the CM. As a constructor, the CM holds the subcontracts but the risks may, based on the nature of the agreement, reside with the owner or CM. Under a “cost plus” agreement, the owner is at risk; under a guaranteed maximum price (“GMP”) or stipulated sum agreement, the CM is at risk. (In our blog of March 15, 2021, we discussed a hybrid form of agreement, where the various risks were divided between the parties.)
Unless the CM is acting as an advisor or the agreement is “cost plus” in nature, the CM should be held fully accountable, as a contractor, for the risks. Thus, the CM must guarantee (1) the ultimate cost of the project, through a GMP or stipulated sum; (2) the project schedule; and (3) the compliance of the work with the plans and specifications. The construction management agreement itself should contain specific contractual obligations and requirements which place these risks firmly on the CM, such as:
- The work performed by the CM shall be of first class quality and workmanship in accordance with the plans, specifications and other contract documents;
- The CM shall perform all work that is reasonably inferable from the contract documents;
- The CM shall guaranty the performance of the work;
- The CM shall employ best skill, best judgment and best efforts to fulfill the owner’s objectives;
- The CM shall be responsible for the actions of its employees and subcontractors;
- The CM shall furnish an adequate supply of workers, equipment and materials necessary for the construction and completion of the work;
- The CM shall perform the work in accordance with the project schedule;
- The CM shall bear all costs of the work, subject to owner changes or other specified conditions, in accordance with the GMP or stipulated sum.
In summary, as an advisor or a “cost plus” constructor, the CM bears little risk. However, under a GMP or stipulated sum scenario, while there are other risks that fall on the owner, such as unforeseen site conditions or force majeure events, the key risk elements of time, cost and quality should be fully borne by the CM.
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12.28.2021 | PRACTICE AREAS: Real Estate Law