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Managing Construction Risks
Presented by:
Robert C. Epstein Greenberg Traurig, LLP Co-Chair, National Construction Group [email protected] 973.360.7945
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Successful Construction Projects
On time
On budget
Without defects in design or construction
With minimum conflict among the project parties
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Owner• Government Entity
• Developer
• Public/Private Company
Govt AgenciesFed/State/Local
E.&O.Insurance Co.
E.&O.Insurance Co.
ConstructionManager• At Risk• Not At Risk
• Architect
• Engineer
• Consultants
E.&O.Ins Co.
CGLIns Co.
Subconsultants
SuppliersSubcontractorsCGLInsurance Co.
CGLInsurance Co.
Investor
Lender
Surety
GeneralContractor(Or Multiple Primes)
Construction Project Relationships
1st PartyInsurance Co.
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Principal Construction Risks
Risk No. 1: The project as designed costs too much
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Risk No. 1: The project as designed costs too much
[N]either the Architect nor the Owner has control over the cost of labor, materials, or equipment, over the Contractor’s methods of determining bid prices, or over competitive bidding market or negotiation conditions. Accordingly, the Architect cannot and does not warrant or represent that bids or negotiated prices will not vary from the Owner’s Project budget or from any estimate of Construction Cost or evaluation prepared or agreed to by the Architect.
AIA Form B141 (1987) Standard Form Agreement Between Owner and Architect
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Risk No. 1: The project as designed costs too much
Owner involved in design process
Establish a budget
Define the project
Independent cost estimates as design progresses
Add and delete alternatives
Redesign at no cost
Peer review of design
Preconstruction services
BIM
Addressing the Risk
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Principal Construction Risks
Risk No.2: Defects, Failures And Non-Conformities
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What Are Construction Defects?
Deviations from plans and specifications
Functional defects Failure to meet performance criteria Any element of project does not work properly, or
at all Sudden failures
Code violations Diminished useful life Unreasonably high risk of failure Unreasonably high expense to operate Aesthetics
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Typical Causes Of Construction Defects
Design does not work
Poor detailing and drafting
Defective materials
Substitution of inferior materials
Poor workmanship
Deficient inspections
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Owner Recourse Against Designer for Construction Defects
Professional negligence or breach of contract
Liability limitations in professional services contract
Sufficient funds or insurance
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Professional Liability Insurance
Claims made policies
Defense costs reduce coverage
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Owner Recourse Against Contractor For Construction Defects
Commercial General Liability Insurance Covers claims arising from “bodily injury” or
“property damage” caused by an “occurrence” during the policy period, if not excluded from coverage
Business risk exclusion
CGL Insurance “…does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident”
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Builders Risk Insurance
Covers risk of loss/damage to construction work during the construction process
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Principal Construction Risks
Risk No. 3: The Project Site Makes The Project More Difficult 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
Specific disclaimer
Risk sharing
No damages for delay clause
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Principal Construction Risks
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
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Injury To Owner From Delay
Lost product revenues
Lost rentals
Lost use of facility
Liability to contractor for delay damages
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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
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Project Completion is Delayed
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
Addressing the Risk
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Primary Considerations for all Construction Projects:
Project delivery format Project management/oversight Pricing/cost methodology Programming and design Development of a project budget and
cost estimation Scheduling Trade procurement Payment disputes and liens Project team coordination Insurance and bonding Completion assurances and remedies Project close-out
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Typical Construction ContractProvisions Allocating Risks Indemnity Insurance and bonding Waiver of Consequential Damages Scheduling commitments Liquidated Damages Pricing Commitments Design standards Hazardous conditions Unforeseen conditions Defects Changes Constructability Project team coordination and cooperation Warranty provisions Performance defaults Budget contingencies Intellectual Property Rights