Construction Manager as Constructor: A New Option to Deliver Public Construction Projects in Indiana
On March 25, 2014, Governor Mike Pence signed into law House Bill 1196
permitting public agencies to utilize the Construction Manager as Constructor (CMc) method (also commonly referred to as a Construction Manager at Risk) of project delivery to build public facilities with the exception of road, highway, bridge, or potable water or wastewater projects. Under the new law state educational institutions may start using CMc on June 30, 2014, while other public agencies may use this method starting on June 30, 2017. CMc supplements the other two methods of project delivery available to public entities in Indiana: the traditional Design-Bid-Build, where an architect/engineer finalizes the design and then contracts are awarded to a single contractor or multiple contractors that are often managed by an agency construction manager who is paid a fee to manage the contractors but does not hold the contracts; and the relatively new Design-Build (enacted in 2005), where a single entity is responsible for both the design and construction of the project. Indiana joins the majority of states who permit CMc on public projects.
What is a CMc?
A CMc is responsible for constructing the project and serving as a trusted advisor to the owner. Under CMc the constructor is involved much earlier in the process as it provides preconstruction services to the owner. From the outset the CMc provides input to the architect/engineer retained separately by the owner on the design and cost of the project. After each phase of the design the CMc may provide construction cost estimates which help the owner assess whether its scope meets its budget. Generally the CMc contracts to build the project for the cost of the work plus a fee consisting of a percentage of the cost of the work or a lump sum. Often a guaranteed maximum price (GMP) is set at some point during the process, an amount the CMc guarantees the cost of construction work will not exceed.
The relationship between the owner and CMc is much closer than that of the owner and constructor in other delivery methods. The American Institute of Architects (AIA) recognizes this closer relationship by providing in its standard AIA CMc contracts that the CMc accepts a relationship of trust and confidence with the owner and agrees to exercise its skill and judgment in furthering the interests of the owner. Further, transparency is increased because the CMc is obligated to disclose certain costs and fees.
What procedures must be used to select a CMc?
Under the new statute, to utilize a CMc the owner must first publish a notice of request for proposals that includes a statement of criteria, process and procedures by which the CMc will be evaluated, selected, and awarded a contract, information on how the GMP may be established, and a description of insurance requirements. Potential CMc's proposals must include a statement detailing their history of contracting with or hiring minority, women, and veteran business enterprises. The owner must form an evaluation committee to analyze the proposals, and the evaluation committee must give each responder it selects to meet with equal opportunities to communicate with them. The public agency may enter into contract negotiations with the CMc whose proposal has been selected by the evaluation committee based on the responses to the RFPs, the interviews, and an evaluation of the fees. It is important to note that, unlike a general contractor in a Design-Bid-Build project, the CMc that is selected does not have to be the low bidder. If a GMP is to be set, then the contract must describe all clarifications and assumptions on which the GMP is based.
If the request for proposals called for a GMP, the public agency or the CMc may terminate the contract before the GMP has been determined. If the public agency and CMc recommended by the evaluation committee are unable to agree to a contract or the contract is terminated before the GMP is set, then the public agency can negotiate a contract with a different CMc who submitted a proposal or award contracts and complete the project under the applicable public works statute.
How will subcontractors be selected?
The CMc must publicly bid all first tier subcontracts pursuant to the bidding procedures applicable to the public agency. However, the CMc may, prior to the award of a first tier subcontract, prequalify potential bidders based on written criteria established and published by the public agency. As part of its bid the potential subcontractor must submit a statement detailing its professional experience, proposed plan for performing the work, equipment and personnel available to complete the work, current financial status, and best estimate of the cost of each item of work. The subcontract is awarded by the CMc to the first tier subcontractor under the applicable standard for awarding contracts (such as the lowest and best bidder for state educational institutions). The contract between the CMc and the first tier subcontractor must include terms and conditions that are designed to accomplish the work at the lowest possible cost to the public agency.
The CMc can self-perform up to 20% of the total value of the project but only if the public agency approves of the CMc self-performing work and the CMc would be awarded a contract for the work under the applicable standard for awarding contracts.
What are some advantages and disadvantages of using a CMc?
As compared to the traditional Design-Bid-Build project delivery method, public owners now have increased flexibility as they are permitted to select the CMc on factors other than just price. This increased flexibility may also extend to first tier subcontractors as some public owners may also choose to establish written criteria to prequalify first tier subcontractors under the CMc. In addition, many commentators point to the CMc's input during the design process as the primary advantage of using CMc. This input may lead to a reduced number of constructability issues as well as more accurate cost estimates. Also, the establishment of a GMP gives a degree of certainty to the final cost and may help with financing issues, though a GMP does not, of course, provide a guaranty against cost increases. Additionally, the CMc may be able to reduce the time to completion by starting construction before the final design is complete. When first tier subcontractors submit change orders, the CMc has an incentive to thoroughly investigate the change order and seek to reduce its cost as much as possible. All in all, the CMc has more potential risk and more potential reward than an agency construction manager, and this dynamic may serve to increase the quality and timeliness of a project while reducing costs.
As with any project delivery method, potential disadvantages also exist. The CMc may need to have the capacity to obtain a bond for the entire project cost, which is more capacity than that required by a prime contractor awarded one piece of a Design-Bid-Build project managed by an agency construction manager. This could potentially limit the pool of companies capable of serving as a CMc, especially on big projects. In addition, while the CMc's involvement during the design process should reduce disputes related to the design, the potential for the CMc and designer to point fingers at each other when issues arise either during or after construction has not been eliminated. The newly enacted statute permitting CMc has not been subject to interpretation by Indiana courts, and as a result, the lack of legal precedent may result in litigation by companies taking exception to how a public entity chose to interpret the statutory language and requirements contained in the new law.
State educational construction projects will serve as the pilot program for CMc in Indiana. It is likely the legislature will make changes to the statute based on the experiences of the state educational institutions using CMc before other public agencies are permitted to use CMc in mid-2017.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.