Managing Construction Risks - Robert Epstein, Greenberg Traurig

G R E E N B E R G T R A U R I G , L L P | A T T O R N E Y S A T L A W | W W W . G T L A W . C O M
©2014 Greenberg Traurig, LLP. All rights reserved.
Managing Construction Risks
Robert C. Epstein | Greenberg Traurig, LLP
Co-Chair, National Construction Law Practice
epsteinr@gtlaw.com | 973.360.7945

Greenberg Traurig, LLP | gtlaw.com
Successful Construction Projects
> On time
> On budget
> Without defects in design or construction
> With minimum conflict among the project parties
2

CGL
Ins Co.
Construction Project Relationships
3
Owner
• Government Entity
• Developer
• Public/Private Company
Investor
Lender
Existing casualty/
liability insurance
Surety
CGL
Insurance Co.
CGL
Insurance Co.
Subcontractors
Suppliers
and
Fabricators
E.&O.
Ins Co.
CGL
Ins Co.
General
Contractor
(Or Multiple Primes)
E.&O. Insurance
Co.
E.&O. Insurance
Co.
CGL
Insurance Co.
Construction
Manager
• At Risk
• Not At Risk
Gov’t Agencies
Fed/State/Local
• Architect
• Engineer
• Consultants
E.&O.
Insurance Co.
E.&O.
Insurance Co.
Sub-consultants
CGL
Insurance Co.
E.&O.
Insurance
Co.

Construction Contract Structures
4
> Lump-Sum Single price for defined scope of
work
> GMP Guaranteed maximum price,
possibly with shared savings
> Cost Plus Cost of construction plus fee
> Design-
Build
Single entity responsible for design
and construction
> Fast-Track Construction begins before plans
are finalized

Principal Construction Risks
> Risk No. 1: Cost Overruns
5

Risk No. 1: Cost Overruns
6

Risk #1: Cost Overruns
Cause #1:
Inaccurate cost estimates
7

Greenberg Traurig, LLP | gtlaw.com 8

> [N]either the Architect nor the Owner has control over
the cost of labor, materials, or equipment; the
Contractor’s 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 Owner’s 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
10

Cause #2:
Excessive Changes
11

12
Cause #3:
Project Mismanagement

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.”

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

Addressing the Risk
> Establish a firm budget
> Independent cost estimates as design progresses
> Add and delete alternatives
> Peer review of design
> Preconstruction services
> Proactive owner oversight
> BIM
15

> Risk No.2: Defects, Failures And Non-
Conformities
17

All Construction Claims
> 70% Defects in exterior envelope (roof, façade,
below grade)
> 20% Structural defects
> 10% All others (payments, liens and delays)
18

What Are Construction Defects?
> Deviations from plans and specifications
19

What Are Construction Defects?
> Code violations
> Diminished useful life
> Functional defects
– Any element of project does not work properly, or at all
20
-Engineering News Record via Associated Press, 11/28/2016

What Are Construction Defects? (cont)
– Failure to meet performance criteria
– Sudden Failures
21

Hyatt Skywalk Collapse – 1981
22
Before
After

Big Dig Ceiling Collapse – 2006
23

Minneapolis Bridge Collapse – 2007
24

Mecca Crane Collapse, 2015
25

Typical Causes Of Construction Defects
> Design does not work
> Poor detailing and drafting
> Defective materials
> Substitution of inferior materials
> Poor workmanship
> Deficient inspections
26

Owner Recourse Against Designer for
Construction Defects
> Professional negligence or breach of contract
> Liability limitations in professional services
contract
> Sufficient funds or insurance
27

Professional Liability Insurance
> Claims made policies
> Defense costs reduce coverage
28

Owner Recourse Against Contractor For
Construction Defects
> Commercial general liability insurance
> Business risk exclusion
29

Builders Risk Insurance
> Covers risk of loss/damage to construction work
during the construction process
30

> Risk No. 3: Differing Site Conditions
– Conditions of site, soils or subsurface that the
Owner did not disclose and which the contractor
could not reasonably have discovered or
anticipated itself
Addressing the Risk
> Thorough geo-technical investigations
> Specific disclaimer
> Risk sharing
31

> Risk No. 4: Project Completion Is Delayed
– Causes of Project Delay
 Incomplete, inaccurate or poorly coordinated
designs
 Unforeseen site conditions
 Design revisions
 Force majeur
 Other Causes
32

Injury To Owner From Delay
> Lost product revenues
> Lost rentals
> Lost use of facility
> Liability to contractor for delay damages
33

Contractor Delay Damages
> Extended equipment rental
> Standing by with idle employees
> Labor rate escalation
> Materials cost escalation
> Forced work in winter
> Acceleration costs
> Inefficiency costs
> Additional overhead
34

Project Completion is Delayed
Addressing the Risk
> Owner’s pre-construction planning
– Assure permits are in place
– Review design for errors/constructability
– Geotechnical studies
> No damages for delay clause
> Close project supervision
> BIM
35

Questions?
36

Managing Construction Risks - Robert Epstein, Greenberg Traurig

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