Monthly Archives: December 2021

The Case for an Owner’s Representative

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Patrick Johnson and Richard Reizen | Gould & Ratner

The Need for Owners to React in Real Time to Project Changes Caused by Supply Chain Interruptions, Skyrocketing Material Increases and Labor Shortages

A construction project is a marathon and not a sprint. Rushing through the project without preparation and a plan for the long game, will ultimately lead to errors, cost overruns and delays.  For that reason, we counsel our clients about the importance of assembling the right team for success, engaging in active project management, and planning for and knowing how to adapt to project pitfalls.  Both anecdotal evidence and industry studies have confirmed, there is usually a positive financial return realized in cost and time savings from assembling the correct project team and engaging in early project planning.  

The need to make such an investment is even more critical in the current construction climate of unprecedented supply chain interruptions, rising material costs and labor shortages. In this new normal, owners are often compelled to make real time decisions of how to proceed when the selected materials are unavailable, substantially delayed or prohibitively expensive. They also need to implement those decisions with a contractor who may be working with a depleted workforce.  Accordingly, any additional support and advice available to the owner can help place them in the best position possible.

While we have previously addressed the need for pre-construction planning, this update will focus on the benefits of engaging an owner’s representative during the construction process.

The Role of the Owner’s Representative

For projects where the owner does not have an internal construction department, the professional skills, or time to manage the owner’s role, an owner’s representative can assume that role.  Simply put, the owner’s representative is the eyes, ears and voice of the owner on the project to ensure the owner’s interests are protected at all times. The owner’s representative monitors, rather than manages the job, and the responsibilities should be well detailed in the agreement between the parties. The general responsibilities can include assisting the owner in selecting a project team, managing the bidding process, reviewing scope documents, reviewing project costs, monitoring schedules, and assisting with close-out and general advice to the Owner throughout the project.

Services the Owner’s Representative Can Provide to the Owner

As with any party providing services to the owner on a construction project, detailing the scope and roles of each party involved is key. Likewise, the contract between the owner and the owner’s representative should contain a very specific listing of all services that the owner’s representative will perform as well as those which are excluded. Below is a sample of some ways in which the owner’s representative can assist the owner.

Project Team Assembly and Administration

At the onset of the project, the owner’s representative can make recommendations of architects and general contractors for the owner to consider, assist in the interview process by asking questions an owner might not contemplate, review competing bids to make sure the owner is comparing to apples-to-apples, provide insight on past experiences with the team and their reputations, suggest specific team members from the architect or contractor who should be requested, prepare a directory with the contact information for all team members, and even assist in setting initial milestones and preliminary scheduling.  

Pre-Construction Planning

The owner’s representative, through their vast knowledge and construction-related expertise, can also identify potential issues for the owner which will be faced in the project, including but not limited to, anticipated material shortages or pricing escalations, so that these issues and other problems can be adequately discussed and planned for early in the process to avoid further disruption down the road. 

Review of Design Drawings

During the design process, an owner can rely on the owner’s representative to convey to the architect the owner’s general design goals. Likewise, they can help explain the drawings to the owner and point out features as the drawings are generated.  The owner’s representative can also evaluate design alternatives or value engineering concepts as they are suggested during the process and assist the owner with analyzing corresponding cost impacts to the overall budget. Finally, the owner’s representative can assist with attending public meetings on behalf of the owner as governmental and HOA approvals are sought.

Monitoring of RFI Responses

While the owner’s representative will not generally have responsibility for reviewing RFIs on the project, they can monitor them to make sure they are timely and adequate and the owner’s representative can bring any significant ones to the attention of the owner. Smooth lines of communications lead to fewer delays in responding to such requests and help to keep the project on schedule.

Active Project Participation

Typically, owners have full time obligations outside of managing the construction project on a day-to-day basis. An owner’s representative has the bandwidth to monitor various areas of the project itself to ensure that deadlines are being met, information is being relayed to the owners, and the overall project is being built in accordance with the applicable specifications. This active participation also includes attendance at OAC meetings on the owner’s behalf. Again, this provides real-time input, on behalf of the owner, to issues being discussed to ensure appropriate owner involvement and even documentation of correspondence through meeting minutes if questions arise in the future regarding decisions made in such meetings. Similarly, the owner’s representative can make sure certificates of insurance are being collected from the GC and all of its subcontractors.

Adherence to Construction Schedule

In the event an owner does not have the time, or the requisite knowledge, to properly review construction schedules or corresponding delays, an owner’s representative can step in to ensure deadlines are being met. An owner’s representative can monitor personnel on a regular basis, foresee future scheduling bottlenecks or labor conflicts on the project and actively work with trades to suggest solutions to either minimize such delays or offset future delays.  

Budget Issues

Keeping a project on budget can be a time consuming and difficult process. An owner’s representative will continually monitor budgets and review costs as they are submitted all in conjunction with the overall project budget. Additionally, having an individual who continually tracks schedules and promptly responds to construction inquiries in turn reduces the possibility of delays which, almost always, increase project costs. 

Disputed Issues During Construction

In addition, an owner’s representative can act as an intermediary between ownership and project personnel. This can be especially helpful when disputes arise or difficult topics need to be addressed with the team depending on the owner’s comfort level and experience with such issues.  The owner’s representative can also work with the owner to suggest possible solutions to promptly resolve any further disruption. 

Project Close-Out

Last, but certainly not least, is having someone who can assist with effectively wrapping up the project and get the owner across the finish line. Project close-out involves ensuring the project has been completed in accordance with the contract documents, preparing and ensuring compliance with punch lists, ensuring all costs are proper and paid and ensuring the owner has the proper paperwork (i.e. warranties, manuals, drawings, etc.) The ongoing involvement of the owner’s representative can help facilitate the coordination of all necessary documentation throughout the project so that it can be easily assembled when the time comes and help ensure the owner has the necessary paperwork and training it needs to use the project and related components.  

Though an owner’s representative adds to project costs (they may be partially or fully recouped in project savings) and may not be necessary on every construction project, especially smaller, narrow scope projects, it is an important consideration for an owner given the recent rise in supply chain interruptions, material and labor shortages and pricing escalations. An owner’s representative can act as a liaison between the personnel and the owner keeping a close eye on each and every aspect of the project in order to keep your project on budget and on schedule. In today’s climate, that can be the difference between success and failure.

Third Circuit Holds that Duty to Indemnify “Follows” Duty to Defend

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Jeffrey J. Vita | Saxe Doernberger & Vita

In a win for policyholders, the Third Circuit Court of Appeals recently affirmed a District Court’s 2018 ruling, which held that the duty to indemnify follows the duty to defend where a settlement precludes a determination on the facts of the case relative to liability and apportionment.

In Liberty Mutual Insurance Co. v. Penn National Mutual Casualty Insurance Co., a large concrete panel collapsed and killed a construction worker at a construction site in New Kensington, Pennsylvania. Cost Company (“Cost”), Liberty Mutual’s insured, was a masonry subcontractor on the project and had further subcontracted with Pittsburgh Flexicore Co. (“Flexicore”), Penn National’s insured, for the concrete panels. Cost’s subcontract agreement required Flexicore to name Cost as an additional insured under its general liability policy issued by Penn National.

When the construction worker’s widow filed a wrongful death lawsuit against Cost and Flexicore, Cost demanded that Penn National defend and indemnify it as an additional insured under the policy. Penn National refused, arguing that any additional insured status had terminated at the conclusion of Flexicore’s work for Cost. As a result, Liberty Mutual defended Cost in the lawsuit, which was ultimately settled.

Following the settlement, Liberty Mutual sued Penn National, asserting that Cost was an additional insured under the Penn National policy and seeking reimbursement for the sums it paid to defend and indemnify Cost. Each insurer moved for summary judgment. The District Court ruled in Liberty Mutual’s favor, and Penn National appealed.

On appeal, the Third Circuit Court of Appeals first addressed whether Penn National had a duty to defend Cost. Answering in the affirmative, the Court of Appeals reasoned that Cost qualified as an additional insured under the Penn National policy’s Completed Operations endorsement. Moreover, the allegations in the complaint (i.e., that the worker’s death was caused, in part, by Flexicore’s failure to provide warnings) demonstrated that there is a possibility that Penn National’s policy covers the claim.

Turning to the duty to indemnify, the Court of Appeals noted that in an insurance coverage action, “where the underlying tort case has been settled, the insurers may seek a resolution of only the factual disputes that would not have been resolved had the underlying tort suit been tried.” In other words, factual disputes that would have been addressed in the settled underlying litigation cannot be resolved in a coverage action. The Court of Appeals added that where a coverage action raises such disputes, “Pennsylvania law provides that the duty to defend itself triggers the duty to indemnify.”

Moving to the facts of the case, the Third Circuit Court of Appeals agreed with the District Court that “the settlement made it impossible to determine the precise basis of Cost’s and Flexicore’s liability.” Accordingly, the Court of Appeals held that, “[b]ecause such factual disputes cannot be decided in this multiparty, multiclaim case without factfinding in the [Underlying Action], Pennsylvania law requires that Penn National’s duty to indemnify follows its duty to defend Cost.”

Although Liberty Mutual involves a dispute between two insurers, it represents a win for policyholders because it lowers the bar for triggering an insurer’s duty to indemnify in cases where a settlement precludes a factual determination as to the allocation of liability among various defendants. Instead, an insured need only establish that the applicable insurance policy potentially covers the claim in such cases.

Avoiding Project Planning Disasters: How to Spot Problem Projects

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James T. Dixon | Construction Executive

The burden of project planning falls first and foremost upon a project owner. Owners have varying levels of sophistication, and the smart ones fill weak spots on their staff by engaging project managers, construction managers and owner’s representatives.  

Typically, the owner then delegates the largest part of the project’s plan to the contractor in terms of creation and execution of a critical path method schedule during the construction phase.  Before accepting that burden, a wise contractor will evaluate the project to determine if it is on a path to success or disaster. It is guaranteed that an owner’s problems will become the contractor’s problems in one way or another.

There are legendary projects that were also legendary planning failures. The iconic Sydney Opera House is one. The design competition began in 1955. After selecting the architect, the owner implemented a team that involved that architect, a structural engineer and an executive committee of inexperienced politicians. The original plan included a budget of $7 million (Australian) and a completion schedule spread over four years. That executive committee forced the project to start before designs were complete, doubled the number of theaters and then put a strangle-hold on the payment process, eventually causing the architect to quit and return to Europe with the construction drawings. The Opera House opened for its first performance in 1973—14 years late and $98 million over budget.  

Contractors can evaluate the owner’s project planning by focusing on its three primary components—the people, the process and the technical. The best planning incorporates the input of stakeholders from each phase early in the process. It also obtains the buy-in of those team members and creates an environment where that investment is contagious. The chosen project delivery method drives the timing of team assembly and can set the stage for success or failure. From a contractor’s perspective, one key facet to observe, especially in times of volatility like today, is how far ahead pricing decisions must be made. 

On many projects, the best delivery method is one that has the contractor buying out its subcontractors closer to the date of project commencement. From the legal perspective, the delivery method drives the contracting structure and risk allocation.  

Successful projects are also built on processes that are familiar, that provide feedback and that comprehend and are repeated through all project phases. Key processes involve budgeting, scheduling and progress reporting. As for the schedule, all participants should: 

  • validate the work breakdown structure;
  • use the same scheduling software; and 
  • evaluate and approve the baseline schedule. 

Progress reporting includes an effective meeting schedule at appropriate frequencies and involves key stakeholders. Such is the import of feedback that one owner was known to provide incentives not for early completion, but instead for prompt delivery of bad news.  

Finally, a good plan is supported by technical features that support, in particular, the scheduling and progress reporting processes. Not incidentally, those technical features can prove to be invaluable if a dispute arises. The contractor most often has control of these features, and through that control the contractor can ensure project success. Keys to success can include:

  • an integrated planning session at least a month before commencement;
  • early development of the work breakdown structure;
  • early agreement on appropriate schedule detail;
  • successful development of a logical critical path; and 
  • appropriate development of schedule contingency.     

Construction executives can evaluate potential projects to ensure that an owner’s planning failures do not become the contractor’s problems. That evaluation can focus on the three primary components of planning—the personnel, the processes and the technical features. Fortunately, the contractor can control significant aspects of project success, particularly when involved in the project’s early stages. Proper execution on the contractor’s part can ensure project success while also creating key evidence if disputes arise. 

Insurer’s Late Notice Defense Fails on Summary Judgment

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Tred R. Eyerly | Insurance Law Hawaii

    The insurer’s motion for summary judgment to dismiss the claim because the insurer did not provide notice “as soon as practicable” was denied. Vintage Hospitality Group LLC v. Nat’l Trust Ins. Co., 2021 U.S. Dist. LEXIS 192651 (M.D. Ga. Oct. 6, 2021). 

        Vintage owned hotels, one of which was struck by a severe hailstorm on July 21, 2018. Vintage was not aware of roof damage until two months after the storm, and did not make the connection between the hailstorm and roof damage until February 2020, when it reported the damage to National. The claim was denied because it was not reported “as soon as practicable” as required by the policy.

    Vintage sued and National moved for summary judgment. 

    Vintage did not notice the leaks until September 2018. The focus was on fixing the leaks, and connection to the hailstorm did not register. The leaks persisted over the next year and a half. A construction company was called in to evaluate the leaking roof. The construction company advised that the roof had experienced previous hail damage which was causing the leaks. At this point, Vintage connected the damage to the hailstorm. A claim was promptly submitted to National, which denied the claim.

    The National policy did not place a hard deadline for reporting a claim. Georgia law interpreted the phrase “as soon as practicable” as within a reasonable time considering all the circumstances. Vintage reported the claim within a few days of being informed by the roofing contractor that the leaky roof was caused by previous hail damage.

    The court found there was a genuine factual dispute as to whether Vintage gave notice as soon as practicable. The court denied National’s motion. 

Price Escalation in Construction Projects: How to Protect Your Interests

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Samantha Carmickle | Winthrop & Weinstine

The COVID-19 pandemic has had implications that no one ever expected (toilet paper shortage anyone?). Added to the ever growing list of unanticipated consequences: price escalation in construction projects.

In April 2021, supply chain disruptions started leading to increased costs associated with construction projects, and those increased costs have remained in place with very little light at the end of the tunnel.  Between April 2020 and April 2021, input costs (e.g. materials, labor, etc.) for construction projects increased 26.1%.[1] In that same time period, bid prices (i.e. how much a contractor charges for the project) increased only 5.2%.[2] In other words, prices are going up for both contractors and buyers, but contractors are bearing the burden of approximately 21% of the price increases.

So, what can contractors and owners do to protect themselves in a time when price escalation is so unpredictable? In the past, force majeure clauses seemed to be the only option. However, these clauses generally provide only additional time for contractors to complete a construction project if an event which is out of its control occurs. This, on its own, is an impractical solution for the problems faced by contractors and owners in 2021 and that will likely continue into 2022. While supply chain disruptions may result in delays, the biggest issue facing both contractors and owners at this point is increased costs, which force majeure clauses do not address.

If a force majeure clause isn’t the solution, what is? For both contractors and owners, the answer is the same: when negotiating over a new construction contract, request that a price escalation clause be included. To be effective, a price escalation clause should set a baseline price, the bid price of the contract, a ceiling price, and a floor price. It should also be reciprocal and include language that protects both contractors, increasing the baseline price in the event of cost increases, and owners, decreasing the baseline price in the event of cost decreases. Moreover, the price escalation clause should state that any changes, increases or decreases, to the baseline price are based on an objective index, such as a consumer or producer price index, which the parties agree to during the contract formation stage. Both contractors and owners should work with their legal team to ensure that the price escalation clause is enforceable and [fair] to all parties.

If drafted well, a price escalation clause will protect both the contractor’s interest and the owner’s interest during this unprecedented time of supply chain issues and construction cost increases. If you have questions about adding a price escalation clause to your construction contract, please feel free to reach out to the Winthrop team.

[1] Paul Emrath, Nat. Assoc. of Home Builders, Record Numbers of Buildings Report Material Shortages (May 27, 2021), https://www.bls.gov/news.release/ppi.nr0.htm.

[2] Associated Gen. Contractors of Am., Prices for Constr. Materials Continue to Outstrip Bid Prices Over 12 Months, Despite Dip in Sept., Amid Increasing Supply-Chain Problems (Oct. 14, 2021), https://www.agc.org/news/2021/10/14/prices-construction-materials-continue-outstrip-bid-prices-over-12-months-despite