Close
Login to MyACC
ACC Members


Not a Member?

The Association of Corporate Counsel (ACC) is the world's largest organization serving the professional and business interests of attorneys who practice in the legal departments of corporations, associations, nonprofits and other private-sector organizations around the globe.

Join ACC

By: Andrew D. Keetch, akeetch@canteyhanger.com, Partner, Cantey Hanger, LLP, a Meritas Firm

 
The Board has agreed that the time has come to expand production, to venture into a new market or to finally leave behind the undersized facility that has been bursting at the seams for too long. You are going to pursue a capital improvement project. Whether this is a new warehouse or a distribution facility for your goods, a new corporate office or a nine figure state of the art manufacturing plant, planning the project will take you out of your core business and present significant risks to the company. Here are the top 10 things you should consider to manage your risks before you finalize a plan.

 

1. Insurance Program

A bewildering number of things can go wrong on a construction project. A crane can fall, destroying the work in place and injuring workers. A miscalculation in a soil reading or foundation design can make a completed building uninhabitable. A chemical release can harm nearby residents or businesses. Hazardous pollutants can shut down the project. The list goes on. When things go wrong, the right insurance can save the project, but the wrong insurance can doom it. Specialized insurance exists to cover the company, and the company will also want to place minimum insurance standards on everyone involved in the design and construction. You may also wish to consider the use of bonds as a risk management tool. Tip: Engage a sophisticated insurance broker up front to advise the company on what coverages should be put in place, who should fund them and who should administer the plan. Discuss bonding with your broker and possibly consult a bonding company as well.

2. Site Selection Due Diligence

The location of the proposed site will determine whether your company can build the facility it needs. Will zoning permit the general intended use? Will limits on impervious cover or drainage requirements make construction impractical or uneconomical? Location is critical. I've seen an owner spend nearly $1 million in acquisition costs for a property where the soil was too soft to support the planned improvement. A $3,500 geotechnical exam up front could have alerted the owner to the problem. Tip: Don't place all the risk of site selection on the company. Engage real estate and/or design/construction professionals and formally task these persons with site selection duties.

3. Selecting a Project Delivery Method

"Project delivery method" refers to the contractual structure of the construction project. The variables are numerous. The most common method is design-bid-build. The owner first hires a designer who creates the construction plans and specifications. Those plans/specs are then put out to competitive bid to construction firms, and the owner selects from amongst the bidders. The owner will carry usually two sets of contracts, one with the designers and one with the builders. Another popular method is design-build ("D-B"). In true D-B, the owner signs one contract with a D-B firm, and that firm is then responsible for creating and finalizing the design of the improvements as well as constructing them. (Often the owner will commission a separate design firm to create a performance specification which sets forth the project requirements.) In a "construction manager at risk" model, the owner hires a construction manager (usually a sophisticated contractor) which manages the work and holds the contracts, usually in a variation of a traditional design-bid-build project. There are many other variations and models. The choice of project delivery will impact every other part of the project. The decision of which model to use will take into account project risk, owner experience, cost, flexibility on design and other factors. Tip: Many owners miss this step and simply fall into one of the models. Be proactive. Involve legal and construction advisors early on to determine the method which best fits the project.

4. Selecting a Design Firm

If the project won't be D-B, one of the first things the owner must do is select a design firm. The firm should have the requisite expertise. For example, if the project will involve food processing, then conformance with federal regulations on temperature, air flow, etc., will govern the design. The design firm should have significant experience on projects of similar scope and size. The firm should have the capacity to handle the work. An ambitious but understaffed design firm can and will result in a problem project. Tip: Designers will compete for the business. Solicit proposals from 2-3 respected firms. Pay close attention not just to the person who "sells" the services of the firm but also to the design professional(s) who will be the day-to-day interface on the project.

5. Selecting a Contractor

Your method of contractor selection should depend upon your method of project delivery. For purposes of this discussion, we will assume the traditional design-bid-build method. There is no substitute for quality work from a hard-working, efficient, skilled and honest contractor. Selecting such a contractor, however, is no easy task. Rely in large part on the design firm to assist in putting the project out to bid. The project can be bid to anyone or to a select group of contractors. The bid process itself is important, and unless properly managed, a savvy but less than ethical contractor can take advantage of the process to low bid the work, only to raise the price significantly after a contract is signed. Tip: Require detailed bid responses that obligate contractors to identify quantities, likely subcontractors and similar items. Ask the design firm to prepare a "bid spread" and provide its rankings of the contractors based on not just price but the quality of the bid, reputation in the industry, capacity, experience, etc.

6. Negotiating the Contracts

Construction law is, to a large extent, the law of contracts. The construction industry has some of the most well-developed contracts of any industry. The American Institute of Architects ("AIA") sells widely used forms with a reputation for fairness but which arguably shade towards protecting designers and owners. The industry has a large comfort level with AIA forms. After years of working under AIA forms, the contractors came up with their own. The Association of General Contractors of America promulgated the "Consensus" form contracts. As you might imagine, the Consensus docs tend to shade in the favor of contractors and are less widely accepted. The Design-Build Institute of America ("DBIA") has generated forms for D-B projects that it champions (and sells). In addition to these forms, most sophisticated designers and contractors offer their own preferred contract forms. As one might expect, such forms tend to highly favor these companies themselves. Any form of contract must be tailored to the state where the project is located. The standard AIA indemnity provisions, for example, may not satisfy critical individual state requirements for fair notice, and some forms could even expose an owner to a failure of insurance coverage. 1Construction contracts are fraught with risk for the unexperienced. Who will bear the cost of project delays? What will entitle a contractor to a change order? Who is responsible for unknown site conditions? Who will bear the risk for injuries during the project? What will happen when the work deviates from the design and needs to be replaced? Who is responsible for identifying construction errors? How will disputes be resolved? In many ways, the best "risk management" for a construction project happens before the project begins, with a careful approach to project contracts. Tip: Never simply rely on the contract form offered by the designer or contractor. Hire an attorney who focuses his/her work in construction law before the project begins. Involve the legal professional in selecting project delivery and in negotiating the contracts themselves.

7. Conflict Resolution Strategies in Advance

Conflicts will nearly always arise on construction projects. Just a few examples I have seen include:

  • Failing pavement in a parking lot which the contractor blamed on fault design and the designer blamed on faulty construction;
  • $12+ million cost overruns and delays pertaining to earthwork, blamed either on the soils contractor or the program manager;
  • Pre-fabricated glass facade for a high-rise apartment building that did not "fit," allegedly because of the thickness of floor slabs, faulty pre-fabrication or errant design;
  • Replacement of failed piping insulation throughout an NFL football stadium, where everyone blamed, well, everyone.

Plan in advance how to deal with conflicts in a way that minimizes risk to the company and assures project progress. Tip: Work with your legal and insurance teams (and eventually designers and contractors as well) to craft sound conflict resolution strategies before work begins. These will depend on the nature of the project and could range from expedited mediation to risk pooling in advance of resolution to pre-project appointment of an agreed dispute resolution panel.

8. When Time Matters Does the company's business plan depend on timely completion of the project? If time is of the essence, the project needs to account for this in expectations up front, the owner's approach to project management and especially in contract provisions. Adherence to schedule is critical. Contractors will seek contract provisions that increase the contract sum if the project is delayed. Owners may seek to impose "liquidated damages" that accrue if the project does not come in on schedule. Tip: Set a realistic schedule that permits the work to be completed in line with the company's needs, and give your legal team clear guidance on not only timing requirements but also the harm that will result if the project is delayed. The lawyers will draft terms which reflect these realities. Overall, make certain that all project players are aware of the necessary timing.

9. Project Financing

Will the project be located in a historical site, or does it involve restoration of a historic building? Can it be located in a depressed business development zone? Will the project create jobs so that local municipalities might compete to have it located in their jurisdiction? The answers to these and other questions might open the door to alternative financing for the project - which could mean big savings for the company. Tip: Consult a legal or development professional for an assessment of potential alternative project financing.

10. Defense Against Future Claims or Loss

Successful project completion does not end the risk to the owner. Consider just a few examples from actual cases:

  •  Large lien claims from unpaid subs and suppliers;
  •  Motorcyclist badly injured in an accident blamed on curb placement in corporate campus;
  •  Luxury townhomes flooded following completion of a nearby commercial project;
  •  Four people killed while visiting a newly renovated downtown site;
  •  Smoke damaged entire building when fire doors failed to close;
  •  Roof of building became detached in wind event just months after building completion.

The way a project closes can impact an owner's risk for such claims. The first line of defense here is having well-drafted contracts in place before the work begins. Often, however, sophisticated contractors will try to limit their liability at close out. Tip: Assure that all key project team members have some responsibility in close out (such as warranties and final inspections), and keep your legal team involved on all close out documentation - especially as to lien and other releases. Capital improvement projects hold the promise of a brighter future for the company but also carry significant risk. A thoughtful approach ahead of time, sound contracts, and sometimes, spending some additional money to manage the risk, will greatly improve the chances of success. Andy Keetch is a partner at the law firm of Cantey Hanger, LLP, in Dallas/Fort Worth and leads the firm's construction law and litigation practice group.

_________

1In some states, contractual requirements that impose additional burdens on contractors could actually create conditions where insurance coverage will not apply, leaving the owner unprotected
Region: United States
The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
ACC

This site uses cookies to store information on your computer. Some are essential to make our site work properly; others help us improve the user experience.

By using the site, you consent to the placement of these cookies. For more information, read our cookies policy and our privacy policy.

Accept