What Does Your Defense And Indemnity Construction Contract Mean In 2017?

Ryan W. Young | Lewis Brisbois | July 12, 2017

California’s longstanding restrictions on defense and indemnity construction contracts have undergone several changes over the years with significant differences based upon the contract execution date. More specifically, the California Legislature enacted Civil Code § 2782 in 1967, and has amended its provisions several times since 2005. Consequently, parties in a construction dispute often ask, “what version of section 2782 applies, and what does it mean to my case?” We’re here to help. This historical roadmap of Section 2782 will lead you to the answer.

Construction Contracts Executed From 1967 to December 31, 2005

In 1967, the California Legislature enacted Civil Code § 2782 to prohibit any construction contract that requires the promisor (the party accepting the indemnity obligation) to indemnify the promisee (the party benefiting from the indemnity obligation) for property damage, death or bodily injury caused by the sole negligence or willful misconduct of the promisee.

As of 2005, Section 2782 prohibited contracts that purport to indemnify the promisee against liability for damages arising from the sole negligence or willful misconduct of the promisee or the promisee’s agents, servants or independent contractors who are directly responsible to the promisee, or for defects in designs furnished by such persons.1 A typical Type I indemnity clause, however, could require the subcontractor to assume liability for the builder/developer/general contractor’s negligence and misconduct beyond the normal tort law principles of proportionate fault. Thus, under Type I indemnity agreements, the only loss not indemnified was for the sole negligence or willful misconduct of the builder/developer/general contractor. Indeed, the subcontractor was required to indemnify a builder/developer/general contractor for the entire loss, even if the developer performed the majority of the negligent work.

Residential Construction Contracts Executed From January 1, 2006 to December 31, 2007

In 2005, the California Legislature set out to address what were deemed unfair indemnity agreements commonly found in construction contracts which shifted liability from the general contractor to the subcontractor. This, in part, was due to the unfair bargaining power of general contractors and the perceived effect such agreements had on general liability insurance rates.

Consequently, the California Legislature amended Section 2782 to prospectively restrict Type I indemnity provisions in residential construction contracts between builders2 and subcontractors, effective January 1, 2006. More specifically, residential construction contracts entered into after January 1, 2006 could not require a subcontractor to indemnify, including the cost to defend, the builder of original construction individual dwellings3 for construction defect claims arising out of the negligence (or defects in design) of the builder, its agents or other subcontractors, or to the extent the claims did not arise out of the subcontractor’s scope of work.

Residential Construction Contracts Executed From January 1, 2008 to December 31, 2008

Effective January 1, 2008, Section 2782 was amended to clarify that the 2006 amendments regarding residential construction contracts would also apply to a general contractor or contractor “nonaffiliated” with a builder.

Residential Construction Contracts Executed From January 1, 2009 to December 31, 2012

In response to builders requiring subcontractors to pay for their defense costs unrelated to the subcontractor’s work, thereby circumventing the intent of the 2006 amendments and the state’s comparative fault principle, the California Legislature amended Section 2782. For residential construction contracts executed on or after January 1, 2009, a subcontractor has no defense or indemnity obligation to the builder or general contractor in a construction defect action unless and until the builder or general contractor provides a written tender of the claim to the subcontractor. Thereafter, the subcontractor is required to elect to either (1) provide a complete defense of all claims alleged to be caused by the subcontractor, or (2) pay the builder or general contractor the reasonable allocated share of the builder’s or general contractor’s defense fees and costs, on an ongoing basis with shares allocated to each subcontractor and/or the builder or contractor itself.

All Construction Contracts Executed On Or After January 1, 2013

The California Legislature placed further restrictions on construction contracts through its passage of Senate Bill No. 474 which applies to contracts executed on or after January 1, 2013.

Civil Code § 2782 now renders void and unenforceable any construction contract with a public entity or private property owner that purports to relieve a public entity or private property owner for its active negligence or to shift such liability to a contractor, subcontractor or supplier of goods or services. This prohibition only applies to owners that are not acting as a contractor or supplier of materials.

Non-Residential Construction Contracts Executed On Or After January 1, 2013

Non-residential contracts executed on or after January 1, 2013, that require a subcontractor to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor against liability for claims of property damage, death or bodily injury are now void and unenforceable where such claims arise out of the active negligence or willful misconduct (or defects in design) of that general contractor, construction manager, or other subcontractor (or their agents), or to the extent such claims do not arise out of the subcontractor’s scope of work under the construction contract. 4

We will continue to follow developments in Section 2782 and will report on changes to the law and relevant cases in future editions of this newsletter. Although you should always seek legal advice as to your particular case, we provide the following chart for ease of reference.

Footnotes

1 Section 2872 also prohibits construction contracts with a public agency which imposes on the contractor, or relieves the public agency from, liability for the active negligence of the public agency.

2 “Builder” means any entity or individual, including, but not limited to a builder, developer, general contractor, contractor, or original seller who, at the time of sale, was also in the business of selling residential units to the public for the property. “Builder” did not include any entity or individual whose involvement is limited to his or her capacity as general contractor or contractor and who is not a partner, member of, subsidiary of, or otherwise similarly affiliated with the builder. These nonaffiliated general contractors and nonaffiliated contractors were treated the same as subcontractors, material suppliers, individual product manufacturers, and design professionals. Cal Civ. Code § 911.

3 See, Civil Code § 896.

4 See Civil Code § 2782.05 for exclusions including, but not limited to, direct contracts with public agencies, owners of private property, design professionals, and any wrap-up insurance policy. 

Thinking Beyond the Dispute Resolution Provision in Construction Disputes

Benjamin Pollock | King & Spalding | June 5, 2017

When parties cannot resolve a claim during a major construction project, the contracts dispute resolution provisions do not always need to read as step-by-step instructions. To the contrary, the situation may warrant a different approach that can be negotiated after the dispute arises. While agreement certainly is required to deviate from the contractual obligations which themselves reflect the parties prior and current agreement other options can be considered and proposed whenever they would be beneficial to the Project or parties needs. This article discusses alternative methods by which a resolution to a construction dispute concerning costs or delays can be found in ways not necessarily proscribed by the contracts dispute resolution provisions.

Contracts Do Not Predict Every Situation

As an initial point, by no means is this article suggesting that the contract should be ignored or disregarded. Indeed, the contract provisions should be the embodiment of the good faith negotiations of the parties, often hard-won through sophisticated bargaining. But this does not mean that one size fits all, and the individual situation and claims should be considered when an actual dispute must be managed.

This can be particularly true when circumstances change between the parties, or when the companies develop a business relationship outside of the one specific project. To be sure, the contracts dispute resolution provisions establish the original framework by which the parties are to resolve disputes arising from construction of that individual project. But the realities can change when those companies subsequently enter into additional contracts regarding multiple projects, or agree to an Operation and Maintenance Agreement that binds them to each other at the same site for multiple years following completion. Suddenly, the prospect of filing for arbitration over the one construction dispute can become a challenging or unacceptable option. Indeed, preserving the relationship and maintaining peace may prove more valuable than escalating a dispute to a jury or an independent panel. And with arbitration or litigation seen as a last-ditch option, the parties may do well to think beyond the contracts instructions in order to get the dispute resolved.

Conditions Precedent Can Be Mutually Waived or Changed

In many ways, a contracts dispute resolution provision can be seen as the designation of the ultimate deciderarbitrator, judge, or juryand a series of conditions precedent that must be followed before reaching the final stage. These conditions serve various purposes, like promoting party communication in an attempt to avoid costly litigation, or ensuring notifications are being effected internally at appropriate levels of management. These interim steps can include formal notice, a mediation or other non-binding proceeding, various waiting periods, and/or a meeting between management personnel. When a particular dispute reaches impasse, however, these actions may not always serve their intended purpose. In such scenarios, the contract provisions do not always need to be strictly adhered to, but instead should be evaluated for their perceived effectiveness under the circumstances. When it serves both parties or the Project to take different action, consider seeking a mutual agreement to waive or adjust certain of these conditions.

Take waiting periods. It is not uncommon for a contract to mandate that arbitration cannot be filed until a certain number of days after a formal notice letter is served (or other triggering event). But what if the dispute is impacting critical path activities, and a quick resolution would allow the parties to mitigate the impact or at least would provide the parties more certainty regarding the risks of a situation already affecting cost and schedule? As an initial matter, the owner may do well to instruct the contractor to continue working, or enter into a temporary agreement that maintains Project progress while the claim is addressed. But in this scenario, both parties may wish to consider waiving the required waiting period and submitting the dispute on an expedited schedule. Similarly, both sides may benefit from adding strict time limits on the selection process of nominating one arbitrator eachwho then nominate a chairpersonor even forgoing this timely process in favor of selecting a single fact-finder.

Another example is mandatory meetings between managers. Sometimes it may be patently obvious that certain disputes will not be resolved at such meetings. Perhaps the representatives designated by the contract have personality conflicts, the parties positions are extreme and irreconcilable, or the contemplated meeting would present other challenges that may actually exacerbate the situation. If the parties are entrenched in their positions, more might be at stake than a waste of time and resources: ill will can result if one party believes the other is not participating in good faith. In certain circumstances, a discussion by the designated persons about the dispute can do more harm than good.

Agreeing not to hold such a meeting is an option, although generally speaking, parties engaging in discussion before launching litigation is a good thing. If the contract requirements do not create an environment for success, they can be tweaked. Notwithstanding contractual restrictions on attendees, the parties can agree to select personnel best suited to attend, usually so long as there is someone present with decision-making authority. The presence of a mediator, expert, or third party neutral to facilitate discussions and offer opinions can be considered, regardless of whether the contract requires such a presence. And rather than meeting to discuss the merits of the disputewhich likely is encapsulated already in opinionated change documentation and argumentative claims letterscommercial settlements can be discussed instead. Indeed, such proposalsbonus milestones, additional resources, overtime, changes to the payment schedule, etc.may resolve the dispute without having to discuss, much less decide, the contentious issues, and can also benefit project progress itself. In these ways, parties can still hold the required meeting but tailor it to best position themselves for success.

Conclusion

A dispute resolution provision identifies the final arbiter of a dispute and contains other requirements meant to facilitate discussion and negotiation so that litigation can be avoided. Sometimes, however, the specific provisions will not best serve those purposes. In these situations, prudent parties will study the contracts requirements but also consider options that might more effectively resolve the particular dispute at issue, get the project back on track, and improverather than harmthe business relationship. Rather than view the various required stages as items on a checklist, parties can agree to waive or alter certain provisions and thereby adopt a procedure that may better facilitate resolution the specific dispute.

Do Minnesota Municipalities Have the Authority to Source Public Works Contracts Using the Construction Manager at Risk Delivery Method?

Jocelyn Knoll and Lauren Roso | Dorsey | June 20, 2017

Recently, at least two experienced attorneys, one who represents contractors and the other who primarily represents public authorities, have published position papers opining whether Minnesota municipalities have the power and authority to use the Construction Manager at Risk (CMAR) contract delivery method when awarding construction contracts. The contractors’ attorney’s position is that public authorities cannot award a public works contract using the CMAR delivery method; the municipal attorney has taken the position that public authorities can award a public contract using the CMAR method. Who is right?

After studying the applicable statutes and legislative history, we believe state and local public authorities in Minnesota likely have the legal discretion to use best value sourcing to award construction contracts that use the CMAR delivery method. Minnesota’s Municipal Contracting Law applies directly to counties, towns, cities, school districts, and “other municipal corporation[s] or political subdivision[s] of the state authorized by law to enter into contracts.” Minn. Stat.
§ 471.345. The Municipal Contracting Law authorizes non-State public authorities (municipalities) to use the best value procurement option set forth in Minnesota Statutes §16C.28, subd. 1(a)(2) and 1(c). See Minn. Stat. § 471.345, subds. 3a and 4a. Chapter 16C is the State Contracting Law and normally applies only to the State and its agencies, but the carve outs in Section 471.345 and other statutes allow municipalities to also use best value award processes in lieu of awarding construction contracts to the lowest responsible bidder. Neither Sections 471.345 nor 16C.28 limit—or even address—the use of the various types of construction contract forms or project delivery methods that fall within the purview of best value. Section 471.345, subds. 3a and 4a, sets forth the specific provisions in Section 16C.28 that public authorities must follow when they award any construction contract using the best value process. Importantly, the best value law applies to “all construction contracts.”

Based on this construct, our understanding is that the Minnesota League of Cities (the “League”) advises its member cities that the best value carve outs in Section 471.345 expressly authorize municipalities to use the best value process set forth in Section 16C.28, subd. 1(a)(2) and 1(c) when awarding construction contracts, regardless of the type of construction contract form or the project delivery method. There is no dispute that CMAR is a type of construction contract. Accordingly, it makes sense that the League has taken the position that a CMAR contract is allowed under Minnesota’s best value law. The League’s position is supported by the statutes’ plain language and legislative history.

That said, to date, we are unaware of any Minnesota district or appellate court case where a disgruntled proposer or concerned tax payer has challenged a municipality’s best value sourcing of a Minnesota public construction contract where the public authority used the CMAR delivery method. Accordingly, a Minnesota court has not yet weighed in on whether municipalities have the authority under Section 471.345 to source public contracts using the CMAR delivery method. If Minnesota courts are asked to decide the issue, they will obviously analyze the applicable statutes and, if necessary, review the legislative history supporting the 2007 amendments to, among other statutes, Minnesota Statute Sections 471.345 and 16C.28. Based on the above, we believe a court would conclude Minnesota municipalities have the authority to source public contracts using the CMAR delivery method.

DISCUSSION

I. Minnesota Statutes Support Municipalities Using Their Best Value Contracting Authority to Source a Construction Project Using CMAR.

    Minnesota’s Municipal Contracting Law allows municipalities to use the best value selection award process for construction contracts over $25,000. Minn. Stat. § 471.345, subds. 3a and 4a. Specifically, Subdivision 3a applies to construction contracts more than $100,000 and provides that “[a]s an alternative to the procurement method described in subdivision 3, municipalities may award a contract for construction, alteration, repair, or maintenance work to the vendor or contractor offering the best value under a request for proposals as described in section 16C.28, subdivision 1, paragraph (a), clause (2), and paragraph (c).” Subdivision 4a contains nearly identical language, but its application is limited to public contracts between $25,001-$99,999.99.

Best value procurement is a means of sourcing a contractor or vendor. Its focus is on the overall value of a contract, rather than just the lowest price responsible bidder. Best value is not a construction delivery method. “Best value procurement knows no boundaries when it comes to the method of project delivery.” Best Value Procurement: Lessons Learned, p. 26, REGENTS OF THE UNIVERSITY OF MINNESOTA (2009). Stated differently, Minnesota’s best value laws contain no limitation on the type of contract or construction delivery method that public authorities can use to deliver their construction projects.

Notably, there are many different types of construction contracts (e.g., lump sum, unit price, cost plus percentage of cost, cost plus fixed fee, cost plus fee plus profit sharing, cost plus sliding fee, guaranteed maximum price (GMP), Engineering Procurement Construction (EPC), Construction Manager Agency (CMA), Design-Build, CMAR, and others). The numerous types of construction contract forms can be assigned to two broad categories: price given in advance contracts (price-based contracts) and cost reimbursement contracts (cost-based contracts). Price-based contracts fit within the lowest responsible bidder framework. In contrast, cost-based contracts fit within the best value framework.

Accordingly, if a municipality exercises its best value authority under Sections 471.345, subds. 3a or 4a, and follows the applicable statutory requirements set forth in Section 16C.28, there is no law that expressly prohibits the municipality from sourcing a construction project using any type of contract form or delivery method, including CMAR.

In sum, an entity that agrees to a CMAR delivery method is committing to act as a construction manager and deliver the project within a GMP and by a specified time. The construction manager provides professional services and acts as a consultant to the owner in both the design and construction phases of the project, and may also perform some of the construction itself. The construction manager thus is responsible to manage and control construction costs to come in under the GMP.

Turning back then to Minnesota’s statutory scheme, which allows municipalities to utilize a CMAR delivery method in a best value framework, Minnesota’s Municipal Contracting Law expressly incorporates pertinent provisions from the State’s Best Value statute, Section 16C.28. The Best Value statute sets forth the legal parameters for the state’s award of construction contracts using the best value procurement method:

(a) All state building and construction contracts entered into by or under the supervision of the commissioner or an agency for which competitive bids or proposals are required may be awarded to either of the following: …

(2) the vendor or contractor offering the best value, taking into account the specifications of the request for proposals, the price and performance criteria as set forth in subdivision 1b, and described in the solicitation document. …

(c) When using the procurement process described in subdivision 1, paragraph (a), clause (2), the solicitation document must state the relative weight of price and other selection criteria. The award must be made to the vendor or contractor offering the best value applying the weighted selection criteria. If an interview of the vendor’s or contractor’s personnel is one of the selection criteria, the relative weight of the interview shall be stated in the solicitation document and applied accordingly.

Minn. Stat. § 16C.28, subd. 1(a)(2) and 1(c) (emphasis added). And, under the Municipal Contracting Law, those parameters and permissions also apply to municipalities. Minn. Stat. § 471.345, subds. 3a and 4a. Under Chapter 16C, and for the purposes of construction contracts, “best value” is defined as a procurement method that considers price and other criteria, Minn. Stat. § 16C.28, subd. 1b(1)-(9). Because the statute expressly applies to “all” construction contracts, it makes sense that there is no list of the types of allowable construction contract forms or delivery methods. Further, there is no requirement that the public authority wait to source a best value construction project until the project is completely designed or it knows the full price of the project; rather, the requirement is that the public authority must consider performance and price, in part, as part of its best value award process. Minn. Stat. § 16C.28, subd. 1b. While the Legislature requires public authorities to consider price when sourcing best value contracts, the statute does not define price or provide any framework for complying with the requirement. See generally Minn. Stat. §§ 16C.02 (“Definitions”); 16C.28, subd. 1b (“Best value; definition”); or 16C.32 (“Design-build contracts, Definitions”); and 471.345.

II. The League Advises Its Member Cities That Their Best Value Authority Includes Contract Awards Using CMAR.

    Public authorities, including cities, counties, public entities, and corporations in Minnesota can award contracts based on a best value selection process. See Minn. Stat. §§ 412.311, subd. 2; 429.041, subd. 2a; 469.015, subd. 1a; 469.101, subd. 5a; and 471.345, subds. 3a, 4a, and 5. Attorneys representing League members advise Minnesota cities that they have discretion to use best value to source construction projects using the CMAR delivery method. While we are aware that some municipalities are initially entering into Construction Manager Agency contracts and then subsequently converting those contracts to CMAR contracts, we believe the better procurement practice is to award a CMAR contract from the start, ensuring the contract is competitively let in accordance with the best value criteria set forth in Minn. Stat.
§ 16C.28.

The League’s Handbook for Minnesota Cities provides:

Best value provides an alternative to the competitive bidding process for contracts for construction, building, alteration, improvement, or repair work. A city may award this type of contract to the vendor or contractor offering the best value through the request for proposals process set forth in state law.

* * * * * * * * * * * * *

[a] city’s request for proposal (RFP) must set forth the criteria to evaluate best value contracting. The RFP also must state the relative weight assigned to price, as well as to other selection criteria.

LMC Handbook, Chapter 22, pp. 26-27.

As required by Minn. Stat. § 16C.28, the League sponsors training for its member cities on how to source contracts using the best value award method. Attorneys who conduct the training focus part of the session on CMAR contracts. Moreover, several Minnesota cities and counties that have participated in the training have used the best value selection process to award CMAR contracts (e.g., City of Eagan and St. Louis County). As discussed, we are not aware of any legal challenge to those awards.

III. The History of Minnesota’s Best Value Law and Its Incorporation Into § 471.345 (and other Statutes) Confirms the Legislature Intended Non-State Public Authorities to Have the Discretion to Use the CMAR Delivery Method.

    In 2007, the Minnesota Legislature amended Chapter 16C to authorize the State and its agencies to award construction contracts using either the lowest responsible bidder or the best value methods. 2007 Minnesota Session Laws, Chapter 148-H.F. No. 548. Today, the best value legal framework and parameters for construction contracts is set forth in Minn. Stat. 16C.28. Importantly, at the same time it authorized the State to award construction contracts using best value contracting, the Legislature amended several other procurement statutes, including Section 471.345, to allow non-State corporations and entities and Minnesota cities and counties to use best value contracting. ID.

Two years earlier, in 2005, the Legislature had granted limited authority to the State and its agencies to use design-build and the CMAR delivery methods when awarding State construction contracts. 2005 Minnesota Session Laws, Chapter 78-S.F. No. 1335. Today, the design-build and CMAR statutes that expressly apply to the State and its agencies are set forth in Minnesota Statutes Section 16C.33 and .34, respectively. Notably, in 2001, the Legislature authorized MnDOT to source construction contracts using the design-build delivery method. In 2002, the Legislature authorized the Department of Administration, the University of Minnesota, and MnSCU to source construction projects funded in the 2002 bonding bill using the design-build delivery method. The Legislature later authorized these public entities to use design-build beyond 2002. Likewise, in 2002, the Legislature authorized Hennepin County to source construction contracts using the design-build delivery method. Minn. Stat. § 383B.158. Subsequently, municipalities and other public authorities in Minnesota clamored for the legal authority to use non-traditional delivery methods, including design-build and CMAR. The State and its agencies, in turn, wanted discretion to award all construction contracts using the lowest responsible bidder or best value procurement systems, regardless of project delivery method. Other public authorities in the State supported this effort, as did certain industry groups. Thus, in 2007, State lawmakers introduced, considered, and enacted best value legislation that authorized State and non-State public authorities to award all construction contracts using a competitive bidding or best value procurement process. See Sections 16C.28 and 471.345.

To determine whether the Legislature and proponents of the best value contracting law intended the amendments to allow best value sourcing of construction contracts to include the CMAR delivery method, we studied the legislative history of amendments to Chapter 16C and Section 471.345. Our research included listening to audio recordings from the hearings where legislators debated the bill and interested industry representatives testified. Our review revealed that the history of the best value amendments is consistent with our interpretation of the plain language of the statute, i.e., non-State agencies have the authority to use a best value procurement process to award any type of construction contract, including CMAR, provided the procurement process follows the framework set forth in the Best Value statute.

A summary of our findings and observations are set forth below.

1. Legislative History: Price

– The general purpose of the best value statute is to encourage consideration of “value” generally, and seek the “best overall performance over the cheapest price up-front.” State and Local Government Operations and Oversight Committee Hearing (Mar. 26, 2007) (Senator Metzen, bill author). This suggests that full price is not required for best value contracting.

– The overarching concern expressed in the legislative hearings was the subjectivity involved in selecting a best value contractor. The Legislature’s inclusion of price as a consideration when using best value was done to retain an element of objectivity. But there was no explicit discussion of the price requirement.

– The inclination of those testifying in support of the best value amendment and its application to non-State entities was to make clear that so long as the entity requesting best value proposals to source a construction contract could state relative weight of price in general, the lack of a hard-bottom-line number would not foreclose the possibility of using design-build, CMAR, or some other contract or project delivery method.

2. Legislative History: Best Value and Project Delivery Methods

    The legislative hearings suggest strongly that best value contracting includes projects delivered by the design-build and CMAR methods. Significantly, advocates of best value contracting relied heavily on the success the University of Minnesota and Department of Administration had in using design-build and CMAR contracts after Section 16C.33-34 provided those entities the option to use alternative procurement methods.

○ The University conducted 27 pilot projects using both the design-build and CMAR methods; projects came in on average at thirteen-percent below budget.

○ Mike Perkins, University of Minnesota, Local Government and Metropolitan Affairs Committee Hearing (Feb. 28, 2007): The University has been using best value for over a year and a half, including design- build and CMAR projects. The best value statute would “expand” considerations for CMAR contracting and provide more guidance for that process. (Emphasis ours.)

Specific testimony supporting the proposition that best value encompasses CMAR and other delivery methods such as design-build provides further support that the Legislature did not intend to limit best value sourcing to specific types of contracts or delivery methods.

○ Rich Miller, Construction Trades Council, Local Government and Metropolitan Affairs Committee Hearing (Feb. 28, 2007): best value “does not require a specific procurement system.” (Emphasis ours.)

○ Rich Miller, Construction Trades Council, State and Local Government Operations and Oversight Committee Hearing (Mar. 1, 2007): Design- build, CMAR, and job-order contracting are variations of best value contracting.

○ Representative Hilstrom, Commerce and Labor Committee Hearing (Mar. 13, 2007): The University already has the authority “to do this” (discussing best value contracting, through use of design-build and CMAR).

○ Rich Miller, Construction Trades Council, Governmental Operations, Reform, Technology and Elections Committee Hearing (Mar. 20, 2007): Other bills providing the Department of Administration with the ability to use different contracting methods in the past (design-build/CMAR/job- order); these are “similar tools.”

Indeed, the Minnesota Commissioner of Administration, the person charged with establishing procedures for developing and awarding best value requests for proposals for State construction projects, has identified those documents as “Construction Best Value Procedures.” And those best value procedures include sourcing projects using the CMAR delivery method.

The 2007 amendments to add the term “proposal” in addition to the term “bid” in Minn. Stat. § 16C.28 is telling. A request for proposals, as opposed to an invitation for bids, allows a public authority to solicit proposals to achieve best value considerations, even when the full terms of the contract or the design of the project is not entirely known. This scenario completely aligns with the CMAR delivery method. Indeed, one of the hallmarks of the CMAR delivery method is that construction may start before design completion (commonly referred to as “fast-tracking”), which, in turn, reduces the project schedule.

In practice, public authorities use best value to source construction contracts “to match the best qualified contractor to the project, thereby reducing the owner’s risk and increasing the value received.” Best Value Procurement: Lessons Learned, p. 3, REGENTS OF THE UNIVERSITY OF MINNESOTA (2009). This broad discretion and flexibility makes sense because value considerations can—and frequently do—include specific diversity goals for a project. Unfortunately, when public authorities award construction contracts to the lowest responsible bidder using the traditional design-bid-build delivery method, the low bidder frequently falls short of the public authority’s goal for diversity hiring for the project. For example, a recent March 29, 2017 MINNEAPOLIS STARTRIBUNE article entitled “Diversity in hiring falls short of goals for public construction projects,” discusses the challenges public authorities encounter when they award public construction contracts. “Contractors don’t have to meet the goals to win bids—there’s wiggle room for those that come up short but demonstrate ‘good faith efforts’ in their hiring,” according to Velma Korbel, director of the Minneapolis Department of Civil Rights. One of the many advantages of using best value sourcing and the CMAR delivery method is an experienced CMAR contractor can help position the project so it meets or exceeds diversity goals.

That said, regardless of the contract type or project delivery method, cost realism should always play an important part in public authorities’ source selections. This means that although the statute does not require the public authority to issue an RFP requiring all proposals to include a total (or guaranteed) price for the construction of the project at the outset of the initial award for preconstruction services, price criteria is always a consideration. For a CMAR contract, pricing criteria commonly considered by a public authority includes: preconstruction fee, construction fee, at-risk fee, general conditions, and contingency. In most cases, the parties will agree to a guaranteed maximum price (GMP) later in the design process.

The best value alternative available to municipalities, as set forth in Section 471.345, is not without important safeguards. To avoid favoritism, and to include transparency in the process, Minnesota’s best value law includes two important safety measures. Significantly, the solicitation document must state the “criteria to be used to evaluate the proposals,” and the “relative weight of price and other selection criteria.” The award must be evaluated “in an open and competitive manner,” and must be made to the vendor or contractor offering the best value applying the weighted selection criteria.” These measures are intended to reduce potential abuses by forbidding post-bid changes to the weighting schedule identified in the solicitation document. Further, full disclosure of all criteria and sub-criteria and their weighted ranking provides a standard of objectivity in a process that will include the subjective evaluation of contractor proposals.

CONCLUSION

CMAR is a proper best value contracting method when a municipality’s request for proposal explicitly lists price considerations and states the relative weight that will be given to each selection criteria. CMAR complies with the requirements of the best value alternative set forth in Section 471.345, subds. 3a and 4a, and fits under both the letter and spirit of the best value legislation.

Construction Contracts-Design vs. Performance Specifications

J. Norman Stark | July 3, 2017

Construction contract specifications are not all the same. These individual written forms of construction documents describe materials, methods, quality and methods of incorporating them in the total improvement project. Every set of specifications prepared by the architect or engineer, have separate, distinct functions. More importantly, design specifications have legally distinct implications from performance specifications.

How Construction Law Compares Construction Contract Specification Terms

The construction project’s design specifications describe materials and methods to be employed, as a formal guide to be followed, without deviation. Performance specifications describe the end result as a general, objective standard; the manner in which the construction work is to be performed is left to the contractor to perform and complete the work.

Each of these standards are legal terms, based upon the landmark decision and principle which set the standard for the implied warranty of specifications, also known as the “Spearin Doctrine”. The U.S. Supreme Court, in its decision, held: “Where one agrees to do for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation because unforeseen difficulties are encountered…But if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.”United States v. Spearin, 248 U.S. 132 (1918). This principle has been followed since its announcement, by the courts in almost every state of the United States and U.S. territories.

Simply stated, the owner impliedly warrants that if the contractor performs the work in accordance with the owner’s construction plans and specifications, resulting in a failure or deficiency, the owner and not the contractor, is responsible. Therefore, in all construction claims it is particularly important to distinguish, whether the fault is legally attributable to a design or performance specification, and as an exception to the general legal rule, where the construction contractor participates in the design or controls the methods of performance. A construction claim’s resolution will rely upon the determination of whether the specification was a design or performance issue. Where there is a difference, there is also a legal distinction.

Risk is More Than Just a Board Game: A Guide to Performance Bonds

Brian L. Lynch | Faegre Baker Daniels | June 21, 2017

Although other forms of security are possible to secure performance of a construction contract, corporate surety performance bonds remain the construction contract guarantee of choice for owners in both public and private projects.

The performance bond is generally meant to protect the named obligee (i.e., the owner) against the contractor’s default. As such, the surety’s performance obligation is usually offered in various expressions that specifically protect owners, such as the performance of the contract; payment for labor and materials furnished in furtherance of the contract; indemnification of the owner against loss caused by the contractor’s failure to perform; or completion of the contract unconditionally. There are, however, a few different types of bonds that are commonly referred to under the heading of “performance bonds,” which may limit sureties to only one or a few of these different remedies upon the bond being triggered. This has important risk-allocation implications, and it is important that all of the contracting parties know and understand all different types of performance bonds..

The four types of bonds commonly lumped together under the heading of “performance bond” include:

  1. Traditional performance bonds, such as the AIA A312 performance bond
  2. Indemnity bonds, such as the Federal Standard Form 25 performance bond
  3. Completion bonds
  4. Manuscript bonds

Traditional Performance Bonds/AIA A312 Performance Bond

The A312 Performance Bond is one of the clearest, most definitive and most widely used type of traditional common law “performance bonds” in private construction. This type of bond gives sureties a wide array of options following the triggering of its liability, including 1) arranging for the contractor to continue to perform the contract, 2) taking over and completing the contract itself, 3) tendering to the owner a substitute contractor, 4) buying back the bond for the amount the surety may be liable to the owner or 5) denying liability. The A312 Performance Bond also contains an important risk-mitigation provision for contractors and sureties in that it limits, to the extent allowed by law, the duration of the bond to two years after the contractor completes its work at the applicable project.

Indemnity Bond/Federal Standard Form 25 Performance Bond

Under an indemnity bond, the surety’s performance obligation is limited to reimbursing the owner (up to the penal sum of the bond) for any cost of completing the bonded contract in excess of contract funds that remain unpaid at the time the contract is terminated. An indemnity bond exposes the surety to increased risk, since the surety has no control over the owner’s completion of the contract and incurrence of completion costs. Contrary to the A312 Performance Bond, the Federal Standard Form 25 Performance Bond is a type of statutory indemnity bond that simply provides for “payment” as the only performance option. Although written as a pure indemnity bond for “payment of the penal sum,” the surety’s options upon default on a Form 25 Bond are whatever the government agrees to accept.

Completion Bond

Under a completion bond, the surety’s performance obligation is limited to a single option: to take over the work and complete the contract at the sole expense of the surety. While this type of bond is preferred by lenders who finance private construction, such an unconditional completion bond is rarely accepted by sureties without significant qualification to require the owner and its lenders to continue funding completion with funds remaining unpaid under the bonded contract. The completion bond typically names the owner as obligee and its construction lender as a “co-obligee,” thus giving both the owner and construction lender equal rights to enforce the bond.

Manuscript Bond

Last, but not least, is the tailored manuscript combined obligations bond that frequently is prepared by large owners intent on shifting as much risk as possible to the surety and contractor. This type of bond is written by lawyers employing a “belt and suspenders” approach that combines performance, indemnity, completion and lien-free property obligations in a single instrument tailored to apply to specific risks. Because these types of bonds shift risk in drastic ways, they are rarely used in either the public or private sector.

Conclusion

Overall, these different performance bonds — especially manuscript bonds — can have a drastic effect on risk allocation and remedies available to the surety upon triggering of their obligations. As a result, it is important that all contracting parties understand what kind of performance bond is required under the contract and how it may be used to ensure contractor performance.