Final Managing Construction Risks - Greenberg Traurig

Best Practices for Effective Brand Management

Managing Construction RisksRobert C. Epstein | Greenberg Traurig, LLP Co-Chair, National Construction Law [email protected] | 973.360.7945

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Successful Construction ProjectsOn timeOn budgetWithout defects in design or constructionWith minimum conflict among the project parties

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CGLIns Co.Construction Project Relationships3 Owner Government Entity Developer Public/Private CompanyInvestorLenderExisting casualty/liability insuranceSurety CGLInsurance Co. CGLInsurance Co.SubcontractorsSuppliers and FabricatorsE.&O.Ins Co. CGL Ins Co. GeneralContractor(Or Multiple Primes) E.&O. Insurance Co. E.&O. InsuranceCo. CGLInsurance Co.ConstructionManager At Risk Not At RiskGovt AgenciesFed/State/Local Architect Engineer ConsultantsE.&O.Insurance Co.E.&O.Insurance Co. Sub-consultantsCGLInsurance Co. E.&O. InsuranceCo.


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Construction Contract Structures4

>Lump-Sum Single price for defined scope of work >GMPGuaranteed maximum price, possibly with shared savings>Cost PlusCost of construction plus fee >Design-BuildSingle entity responsible for design and construction>Fast-TrackConstruction begins before plans are finalized


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Principal Construction RisksRisk No. 1: Cost Overruns

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Risk No. 1: Cost Overruns 6


Risk #1: Cost Overruns Cause #1: Inaccurate cost estimates7


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Risk No. 1: Cost Overruns [N]either the Architect nor the Owner has control over the cost of labor, materials, or equipment; the Contractors methods of determining bid prices; or competitive bidding, market or negotiating conditions. Accordingly, the Architect cannot and does not warrant or represent that bids or negotiated prices will not vary from the Owners budget for the Cost of the Work or from any estimate of the Cost of the Work or evaluation prepared or agreed to by the Architect.AIA Form B141-2007, Standard Form Agreement Between Owner and Architect

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Risk #1: Cost Overruns Cause #2: Excessive Changes11


Risk #1: Cost Overruns

12Cause #3: Project Mismanagement


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At about the time Revel opened April 2, 2012, officials, who already had the resort carrying $1 billion in debt, would learn construction cost was over budget and they would need to spend $100 million more than expected, Stogsdill said.Unfortunately, the general contractor hired to manage the construction of the Revel made a series of significant budgeting errors that were not disclosed to Revel until the last minute.


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The report blamedconstant design changes, poor control of budgets and mismanaged contracts for the project mishaps.


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Risk No. 1: Cost OverrunsAddressing the RiskEstablish a firm budgetIndependent cost estimates as design progressesAdd and delete alternativesPeer review of designPreconstruction servicesProactive owner oversight BIM

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

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All Construction Claims70% Defects in exterior envelope (roof, faade, below grade)20% Structural defects10% All others (payments, liens and delays)18


What Are Construction Defects?Deviations from plans and specifications

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Bullet comes in first and then the article comes in second19

What Are Construction Defects? Code violationsDiminished useful lifeFunctional defectsAny element of project does not work properly, or at allFailure to meet performance criteriaSudden failures

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Hyatt Skywalk Collapse 198121

Before

After


Big Dig Ceiling Collapse 2006 22


Minneapolis Bridge Collapse 2007 23


Mecca Crane Collapse, 201524


Typical Causes Of Construction DefectsDesign does not workPoor detailing and draftingDefective materialsSubstitution of inferior materialsPoor workmanshipDeficient inspections

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Owner Recourse Against Designer for Construction DefectsProfessional negligence or breach of contractLiability limitations in professional services contractSufficient funds or insurance

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Professional Liability InsuranceClaims made policiesDefense costs reduce coverage

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Owner Recourse Against Contractor For Construction DefectsCommercial general liability insuranceBusiness risk exclusion

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Builders Risk InsuranceCovers risk of loss/damage to construction work during the construction process

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Principal Construction RisksRisk No. 3: Differing Site ConditionsConditions of site, soils or subsurface that the Owner did not disclose and which the contractor could not reasonably have discovered or anticipated itselfAddressing the RiskThorough geo-technical investigationsSpecific disclaimerRisk sharing

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Principal Construction RisksRisk No. 4: Project Completion Is DelayedCauses of Project DelayIncomplete, inaccurate or poorly coordinated designsUnforeseen site conditionsDesign revisionsForce majeurOther Causes

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Injury To Owner From DelayLost product revenuesLost rentalsLost use of facilityLiability to contractor for delay damages

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Contractor Delay DamagesExtended equipment rentalStanding by with idle employeesLabor rate escalationMaterials cost escalationForced work in winterAcceleration costsInefficiency costsAdditional overhead

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Project Completion is DelayedAddressing the RiskOwners pre-construction planningAssure permits are in placeReview design for errors/constructabilityGeotechnical studiesNo damages for delay clause Close project supervisionBIM

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Questions?35
