Emerging Legal Risks for Construction Management Professionals
Publication: Leadership and Management in Engineering
Volume 6, Issue 3
Abstract
The typical structure of a construction project contemplates a tripartite system of an architect, general contractor, and subcontractor. Recent changes in the tripartite system utilized in the construction industry through the addition of construction managers have significantly impacted the allocation of risk assumed by the parties involved in a construction project. Additionally, litigation arising from conflicts and questions relating to the parties’ respective duties and responsibilities is on the rise. Not surprisingly, the scope of the construction manager’s legal responsibilities has expanded as architects and engineers attempt to avoid liability by deleting inspection and supervision responsibilities from their contracts. Unfortunately, the courts have not kept up to date with the addition of construction managers and very few decisions actually address legal issues raised by their involvement. This paper will analyze interview responses from construction management firms to identify what they perceive to be the risks and liabilities associated with construction management. Then, specifically, it will look at the increase and decrease of these identified risks for the construction manager. Through a review of relevant case law, this paper will focus on emerging legal issues regarding construction management in an effort to assist construction managers and those providing them with legal counsel to navigate this emerging area of construction law.
The purpose of this article is to address the risks and liabilities faced by construction managers in this emerging and changing world of construction law. Over the past three decades, the use of construction managers has expanded the number of potential legal issues involved in the construction industry. The typical structure of a construction project contemplates a tripartite system of an architect, general contractor, and subcontractor. The use of a construction manager alters the typical tripartite system and adds another party to consult with when things go wrong on a construction project. Moreover, the addition of a construction manager rearranges the duties and potential liabilities in the overall construction project. Not surprisingly, the scope of the construction manager’s legal responsibilities has expanded as architects and engineers attempt to avoid liability by deleting responsibility for inspection and supervision from their contracts (Wilson 1999; Spangler and Hill 1999).
Although the use of construction management has increased significantly in the construction industry, there are few cases that directly address the liability of construction managers. Yet, litigation involving issues related to the project member’s respective duties and responsibilities is on the rise. The limited case law construing construction manager liability most closely follows the liability of architects and engineers (“Architectural malpractice” 1979). Therefore, it is necessary to review these cases in an effort to determine what liabilities a construction manager actually faces. Once the construction managers are aware of their risks, they can take steps to minimize their occurrence and their potential impacts. In order to determine what risks concern the construction manager, several construction management firms were interviewed. This paper will analyze interview responses from construction management firms to identify what they perceive to be the risks and liabilities associated with construction management. Then, specifically, it will look at the increase and decrease of these identified risks for the construction manager. Through a review of relevant case law, this paper will focus on emerging legal issues regarding construction management in an effort to assist construction managers and those providing them with legal counsel to navigate this emerging area of construction law.
Research methodology
Several construction managers from nationally recognized construction management firms were interviewed regarding the risks they as construction managers perceive involving commercial construction projects. The construction managers were specifically questioned about their concerns regarding the type of construction management services they provide: construction manager at risk, as agent, or a hybrid of both; standard form contracts; design phase issues; value engineering; coordination of contractors; general project administration; supervision issues; and third-party liability. Once the major areas of perceived risk were identified by the construction managers, relevant case law from various jurisdictions was reviewed to determine the actual risks and liabilities faced by the construction manager in the United States courts of law.
Interview results
As will be discussed in more detail throughout the paper, in conjunction with the applicable case law, the construction managers’ concerns depended greatly on the type of construction management services they provided since most contractual liability arises from these services and the contractual relationships created for the projects. Generally, the construction managers were concerned about risks and liabilities arising from poorly tailored form contracts, supervision, and third-party liability. Moreover, depending on the type of relationship they had with the owner (i.e., the construction manager at risk), the construction manager can experience the same concerns and risks as general contractors have regarding delays in the project.
Summary of liabilities
Types of Construction Management Services
Due to the flexibility of the construction manager’s role in the construction industry, it is difficult to define “construction manager” with legal certainty. The construction manager may not only supervise a project but may also conduct design review, cost estimating, project scheduling, contract negotiation, bid procedures, and coordination of trade contractors and safety programs. Ultimately, while part architect and part contractor, the definition of a construction manager, his role and, therefore, his risk, depend on the scope of the work set forth in the actual contract documents.
Three typical models of construction management are used in the construction industry today. A construction manager can be a construction manager at risk, the owner’s agent for a fixed fee with limited risk, or a hybrid of the first two models. The construction manager’s liability to the owner will vary depending on which model is utilized. Moreover, when deciding what type of construction management model to apply, the construction manager must determine the scope of services he wishes to supply and the risks to which he is willing to expose himself. In determining the construction manager’s liability under these various models, the courts have analogized at-risk construction managers to general contractors, and construction managers as agents to design professionals.
Additionally, the construction manager may also have obligations to third parties as a result of his contractual responsibilities or his conduct at the job site. Regardless of whether the construction manager or an agent is at risk, liability to third parties is created based on the construction manager’s superior knowledge or superior control, as discussed below.
Construction Manager At-Risk Model
Under the at-risk model, the construction manager assumes the obligation to construct the project for a stipulated sum or guaranteed maximum price (TRW, Inc., v. Fox Dev. Corp. 1992). The at-risk construction manager, acting like an independent general contractor, may also hold the trade contracts. In this model, the owner has shifted the risks of late completion, defective performance, and construction costs exceeding the stipulated sum or guaranteed maximum price to the construction manager.
Construction Manager as Agent Model
A construction manager as agent acts as an independent professional advisor to the owner. The construction manager as agent is primarily concerned with protecting the owner’s interest and, to achieve that goal, assists the owner in making informed decisions throughout the construction process. The construction manager as agent is paid a fee for his service and, unlike the construction manager at risk model, the owner holds the trade contracts in his own name. Thus, in accordance with general principles of agency, the construction manager will not be in privity with the contractors and will not be liable for the acts or omissions of the contractors, such as defaults, construction delays, or cost overruns; nor will the construction manager as agent assume liability for a principal unless the construction manager’s acts are unauthorized (Owen Steel Co. v. George A. Fuller Co. 1983; Gateway Erectors Div. v. Lutheran General Hospital 1981; Panama Realty, Inc. v. Robison 1975; Smith v. Platt Motors, Inc. 1962). However, while construction managers as agents may not have a duty to ensure proper performance by contractors, they may be liable to the owner for their failure to properly supervise, coordinate, or inspect the work of contractors that results in damages to the owner arising out of the defective performance by contractors.
Hybrid Construction Management Model
In the hybrid model, the parties involved in the construction project shift the roles and the risks of the designers, construction manager, contractor, and owner according to the needs and abilities of the parties. In this model, the construction manager acts as the owner’s agent when performing certain services and as an independent contractor when performing or directly taking responsibility for construction activities (Wilson 1999). This model appears to be favored by the interviewed construction managers as it allows them to allocate the risks to project members who are best suited to bear them. Moreover, they suggest this model favors a friendlier, more cohesive partnering arrangement with everyone on the project.
Use of Standard Forms
The importance of delineating the responsibilities of the principal parties involved in a construction project (i.e., the owner, the architect/engineer, and the construction manager) cannot be stressed enough. Further, an analysis of project-specific issues and the incorporation of contract provisions dealing with those issues are also necessary. Unfortunately, many of the construction managers interviewed, particularly those from smaller firms with less bargaining power, were willing to sign standard form contracts with little or no modification if requested or required by the owner of the project.
The American Institute of Architects (AIA), the Associated General Contractors (AGC), and the Construction Management Association of America (CMAA) have created form contracts that provide for the use of construction management. While these standard forms are a solid base on which to build a contract, they often slant to benefit a particular party and do not contemplate project-specific issues that may arise. A contract that does not clearly define a construction manager’s duties may result in the construction manager being held responsible for performance of services beyond the scope set forth in the contract (see Gibson v. Heiman 1977). Therefore, it is necessary to properly modify these contracts to be project and scope specific to protect the construction manager as well as the other parties involved in the project. Moreover, beyond identifying the construction manager’s scope of work, the contract must expressly identify the contract documents in order to avoid future confusion regarding precontract negotiations and contractual agreements. For example, if the incorporated contract documents are not clearly defined, an owner may suggest that services identified in a precontract proposal or firm brochure were incorporated into the contract documents (Wilson 1999). The inclusion of the proposal may bind the construction manager to the performance of potential services and representations made during the selection and negotiation process or to the allocation of certain risks that the construction manager was not prepared to undertake in the final contract.
Legal Considerations
Breach of Contract or Tort Claims
Contractual risks and the associated claims against construction managers are similar to those faced by general contractors in that they can arise out of a failure to properly perform the duties assumed by contract (Loulakis 1995) or by failing to exercise due care in the performance of their duties (see St. Lucie County v. Federal Construction. Co. 1991: the construction manager was held responsible for not acting properly and promptly to determine the cause of tile work costing many times the original contract amount, i.e., hiring an independent expert to resolve a problem with the tile work). Regardless of the specific cause, the breach arises out of a failure of the construction manager to honor the obligations assumed under the contract. Below are several areas of risk that concern construction managers with regard to the breaching of their contracts and potential tort liability. With the knowledge of where the courts find liability, the construction manager can analyze the risks he may be exposing himself to and the potential ways to avoid an unfavorable outcome (e.g., by limiting contractual obligations and liabilities, by reviewing his resources to determine if the firm is capable of successfully performing the scope of work, etc.).
Design Phase Services
While construction managers generally are not responsible for inadequate designs, they may be liable to both the owner and third parties for negligent design review, even if they lack control over the design process. Generally, the standard of care required by construction managers who are performing functions traditionally handled by an architect or engineer is the same standard required of those professionals. For example, architects are required to possess ordinary skills and abilities to supervise construction activities and are held liable for failing to supervise reasonably and without neglect (Bayshore Development Co. v. Bonfoey 1918). The standard of care required of a construction manager will be measured at the level of competence exercised by members of that profession in a similarly situated situation (see MacIntyre v. Green’s Pool Service, Inc. 1977). In James McKinney and Son, Inc. v. Lake Placid 1980 Olympic Games, Inc. (1983), the construction manager contracted with the owner to manage, supervise, and inspect the construction; to review the architect’s design; and, if necessary, to identify design defects. Based on these contractual obligations, the construction manager could be liable for damages suffered by a subcontractor if the construction manager violated his duty of “due care” and negligently reviewed the inadequate designs. Moreover, a construction manager may also be liable for failing to discover building code violations during design review (Himmel Corp. v. Stade 1977; Henry v. Britt 1969: violation of minimum design standard is “prima facie evidence of negligence”).
Value Engineering
Construction managers may also perform value engineering wherein they review architectural and engineering plans and provide comments regarding potential ways, if any, to lower maintenance costs or lower initial expenses (Wilson 1999). However, providing such advice to the owner is risky for the construction manager who may not be afforded enough time or information to confirm that his recommendations will work with the total design and function of the project. Specifically, the construction manager may be liable for value engineering advice that results in deficient designs, even though the design professional is responsible for accepting and incorporating the construction manager’s value engineering suggestions into the final design. For example, in American Employers’ Insurance Co. v. Maryland Casualty Co. (1975), the owner filed a lawsuit against the construction manager for improperly performing value-engineering services by suggesting a reduction in floor thickness that resulted in structural inadequacies, and against the architect for negligently incorporating the suggestion into the final design. The First Circuit Court of Appeals found that both an architect and a construction manager could be jointly and severally liable to an owner for implementing the negligent value engineering suggestion (American v. Maryland 1975).
Preparing Construction Documents
Construction managers can also be held liable for negligent preparation of construction documents (Northrup Contracting, Inc. v. Village of Bergen 1988). Generally, liability is premised on the subcontractors’ reasonable reliance in preparing and submitting their bids on the adequacy and accuracy of the information contained in the construction documents prepared by the construction manager (Northrup v. Village 1988). Furthermore, the courts have also found that the contractual duty to review drawings and specifications for the general contract flows down to the benefit of subcontractors as well as of the owner (McKinney v. Lake Placid 1983).
Coordinating Contractors
Because coordinating contractors and scheduling are often the most important benefits of using a construction manager, allocation of these duties should be detailed carefully in the contract documents. In a typical construction management project, the construction manager as agent monitors the project schedule and recommends appropriate action without becoming liable for delays or failures of coordination, unless the construction manager negligently performs his duties (Wilson 1999). However, if the construction manager’s duties have been delegated properly, he may be liable to the owner for improper scheduling or monitoring of construction progress (Edwin J. Dobson, Jr., Inc. v. Rutgers State University 1978). Therefore, it is prudent to modify the form contracts to delineate responsibility for scheduling delays, power to enforce the schedule, and form and frequency of schedule updates to the owner such that the construction manager can assess the risks he faces and the best way to ward them off. Although negligent coordination of a construction project by the construction manager does not usually absolve the owner of primary contractual liability to his contractors, the negligent coordination may provide the owner with indemnity and contribution rights against the construction manager for any damages the owner may incur as a result of the negligent coordination (Gateway v. Lutheran 1981; see John v. Green Plumbing & Heating Co. v. Turner Construction Co. 1980 for a discussion of the construction manager’s potential liability for scheduling and coordination and consequent delay to a trade contractor in privity with the owner.
General Project Administration
The construction manager may be responsible for general administration of a project, including construction inspection and approval, supervision of safety programs, and payment of contractors depending on his contractual obligations (St. Lucie County 1991). The respective authority of the construction manager and that of the architect/engineer must be clearly defined in order to avoid conflicts and unintended liability.
Supervision
The risks associated with supervision are of grave concern to the construction managers who were interviewed for this paper. With regard to supervision, construction managers generally agree to perform continuous on-site inspection and supervision for quality control, but disclaim responsibility for construction means and methods and trade contractor defaults (Wilson 1999). Additionally, the construction manager’s authority as it relates to defective work may be limited to notifying the owner, who may stop the work if the owner so chooses. Construction managers may also disclaim responsibility for the design professional’s duties, although these duties often overlap. However, regardless of the disclaimers, the interviewed construction managers raised their concerns about the possibility that their increasing involvement through on-site supervision and inspection would subject them to increased liability for defective work.
Centex-Rooney Construction Co. v. Martin County (1998) represents a typical owner-asserted contract claim. In this case, the role of the construction manager, who was hired by the owner after the design was completed, was virtually indistinguishable from that of a general contractor (Centex-Rooney v. Martin 1998). Under his agreement with the owner, the construction manager assumed complete oversight and control of the project, including the responsibility for selection of the contractors, supervision, coordination, management, and inspection of work. The owner sued the at-risk construction manager for defects with the project’s exterior wall system. Specifically, the owner sued the construction manager for failing to properly supervise the construction and for allowing “shoddy workmanship” to be performed (Centex-Rooney v. Martin 1998). The jury returned an $11 million verdict against the construction manager. On appeal, the Florida Fourth District Court of Appeals affirmed the jury’s verdict and found that the construction manager’s liability arose from his assumption of a very broad obligation to supervise, coordinate, and inspect the work, and from his hiring of the responsible contractors (Centex-Rooney v. Martin 1998).
In First National Bank of Akron v. Cann (1980), the construction manager/contractor and the architect were found jointly and severally liable to the owner for improper construction of a granite wall. The architect was found liable, even though the architect was not required to conduct exhaustive or continuous on-site inspections, because the defects generally would have been observable had the architect inspected the welding and cutting as required by the contract (First v. Cann 1980). The construction manager/contractor was found liable both in his construction manager capacity, for failing to inspect, and in his contractor capacity, for failing to provide good workmanship (First v. Cann 1980).
It must be noted, however, that the above cases represent situations in which the construction manager specifically contracted with the owner to perform at least some supervision on the construction project. The owner’s failure to expressly delegate the responsibility for supervising contractors to the construction manager may preclude the owner from holding the construction manager liable for defective work. For example, in Foster v. Bue (1988), the construction manager was hired to “coordinate” the project but the construction manager also voluntarily supervised the project. Because the construction manager had no duty to provide inspection services, he was not liable either in tort or for breach of contract for failing to detect defects in the contractor’s work (Foster v. Bue 1988).
Liability to Third-Party Beneficiaries
In addition to claims arising out of direct contractual privity, courts have provided third-party beneficiary status to nonparties, thereby allowing these nonparties to sue construction managers even in the absence of privity. To maintain the claims, claimants must prove that they are intended beneficiaries of the construction manager’s contract (Clearwater Key Association—South Beach, Inc. v. Thacker 1983; Joseph Bucheck Construction Corp. v. Music 1982). For example, in Edwin v. Rutgers (1978), the court found that through an express provision in the construction manager’s contract with the owner, which stated that other contractors had a right to rely on the construction manager’s efforts and each prime contractor had a duty to coordinate with the others, the construction manager assumed overall responsibility for supervising and controlling the project and the other contractors were intended beneficiaries of the construction manager’s contract with the owner.
However, construction managers have also been able to expressly disclaim third-party beneficiary status. In Dynamic Construction Co. v. Barton Malow Co. (1995; but see Board of Managers v. Carroll Management, Inc. 1995: the relationship between the board, as representative of the unit owners, and the construction manager “so closely approximated” privity that the board had the right of to assert contract-based claims against the construction manager, notwithstanding the absence of contractual privity between the board and the construction manager and the contractual disclaimer of liability was insufficient) the court focused on the construction manager’s contract with the owner, in which all of the construction manager’s contractual promises ran in favor solely of the owner and it expressly disclaimed third-party beneficiary status as to any other participant on the project. Therefore, the court refused to extend third-party beneficiary status to the contractor (Dynamic v. Malow 1995). Yet, the construction manager is not completely safe from risk even when the third party may not directly sue him based on contract. Instead, when third parties are required to sue the owner, the owner often looks to the construction manager for indemnification.
Liability in Tort to Trade Contractors—Economic Losses
Similar to design professionals, construction managers are facing an increase in tort liability to third parties who are injured or harmed by the construction manager’s professional negligence or malfeasance (Feinman 1995; Cheners and Knox 1995; Steffey 1994; McDonald 1989; Partridge and Noletto 1988; Nischwitz 1984; “Allocation of risk” 1983; Conner 1983; Earley 1977; “Architectural malpractice” 1976). Additionally, as design professionals are attempting to reduce their liability exposures by modifying their standard contracts to reduce the scope of the design professionals’ responsibilities, the construction managers’ risks are increasing, including negligence for strictly economic losses.
Tracking along third-party claims against design professionals, a construction manager’s duties may give rise to liability in tort when the duties he assumed by the contract made it “foreseeable” that the third party would be injured by a breach of the contractually assumed duties, or when the professional services contract established a “special relationship” between the design professional and the injured party (Gateway v. Lutheran 1981; McKinney v. Lake Placid 1983). For example, the construction manager will be liable in tort for improper supervision of a project that interferes with a contractor’s ability to perform his contractual duties (R.S. Noonan, Inc. v. Morrison-Knudsen Co. 1981). Moreover, construction managers are being held responsible for their negligent misrepresentations to third parties, as in Harbor Mechanical, Inc. v. Arizona Electric Power Coop., Inc. (1980), wherein an engineering firm was held liable for telling a trade contractor that the owner would waive contract requirements.
Normally, a construction manager as agent will not be held responsible to the contractor or subcontractor for delay or acceleration damages (“CM action” 1987). However, there are cases in which a construction manager has been found liable for delay damages if he caused or is partially responsible for the delay. In Mobil Chemical Co. v. Blount Brothers Corp. (1987), the construction manager was held partially responsible for delay damages incurred by subcontractors when he failed to assign a competent full-time scheduler to the project and his project manager performed poorly. Furthermore, in McKinney v. Lake Placid (1983), the court allowed a contractor to assert a negligence claim against the construction manager because the duties assumed by the construction manager could “reasonably be said to insure to the benefit of subcontractors…[who are] members of a limited class whose reliance upon the project manager’s ability is clearly foreseeable.”
It is necessary to realize that even though the construction manager may be liable in tort for negligent performance of contractual obligations, no tort liability to third parties will arise if the construction manager acted prudently and within the scope of his authority, even though the contractors suffer damage because of the construction manager’s actions. In the end, just as other design professionals, the construction manager has an obligation to exercise reasonable care in the performance of his contractual and professional obligations. If the construction manager exercises this reasonable care, he may avoid liability on his own part. For example, in Bagwell Coatings, Inc. v. Middle South Energy, Inc. (1986), the construction manager’s construction schedule impeded a fireproofing contractor’s ability to fireproof the structure in the normal manner. Although this resulted in damage to the fireproofing contractor, the court determined that the construction manager’s actions were both prudent and beneficial to the owner’s interests because the project was completed ahead of schedule (Bagwell v. Middle 1986). Therefore, neither the owner nor the fireproofing contractor could maintain an action in tort against the construction manager for the fireproofing contractor’s damages (Bagwell v. Middle 1986).
Conclusion
The addition of a construction manager to the traditional tripartite system found in the construction industry has created many new legal issues resulting from the reallocation of risk to the owner, construction manager, contractor, and design professional. Construction managers are now facing many of the liability issues that precipitated the design professionals’ reduction in the scope of their services. Moreover, with the use of construction managers as agents, owners are assuming more liability and a greater responsibility, through their agents, of the design and construction process. As the cases discussed above indicate, the contractual language in determining the scope of the liabilities assumed by the construction manager is extremely important. Thus, with limited case law related directly to the construction manager, construction managers must take care to clearly and expressly identify in the contract their role in the project and that of the other project members in an effort to increase coordination, efficiency, and cooperation, and to reduce unintended exposure to risks. As the law continues to develop with each court case, it is also necessary to periodically review the case law in order to determine the present and future state of liabilities faced by construction managers.
Recommendations for further study
As stated in the conclusion, the law is continually changing, and as such, it is necessary to periodically review the case law in order to stay abreast of current and future issues. Finally, regarding another area for potential research, many construction managers raised concerns of risks arising from tort liability for injured workers, but due to topic limitations, this paper was not able to directly discuss those risks. However, this is an important topic that should be explored for future discussion.
References
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Biographies
Gouranga C. Banik is an associate professor in the School of Architecture, Civil Engineering, and Construction at Southern Polytechnic State University in Marietta, Ga. He can be reached via e-mail at [email protected]. Andrea L. May is a former graduate student in the School of Architecture, Civil Engineering, and Construction at Southern Polytechnic State University. Andrea is now practicing construction law at Wasson, Sours & Harris, P.C., in Atlanta.
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Leadership and Management in Engineering
Volume 6 • Issue 3 • July 2006
Pages: 102 - 109
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© 2006 ASCE.
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Published online: Jul 1, 2006
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