Managing Construction Risks
Managing Construction RisksRobert C. Epstein | Greenberg
Traurig, LLP Co-Chair, National Construction Law
[email protected] | 973.360.7945
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Successful Construction ProjectsOn timeOn budgetWithout defects
in design or constructionWith minimum conflict among the project
parties
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CGLIns Co.Construction Project Relationships3 Owner Government
Entity Developer Public/Private CompanyInvestorLenderExisting
casualty/liability insuranceSurety CGLInsurance Co. CGLInsurance
Co.SubcontractorsSuppliers and FabricatorsE.&O.Ins Co. CGL Ins
Co. GeneralContractor(Or Multiple Primes) E.&O. Insurance Co.
E.&O. InsuranceCo. CGLInsurance Co.ConstructionManager At Risk
Not At RiskGovt AgenciesFed/State/Local Architect Engineer
ConsultantsE.&O.Insurance Co.E.&O.Insurance Co.
Sub-consultantsCGLInsurance Co. E.&O. InsuranceCo.
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Construction Contract Structures4
>Lump-Sum Single price for defined scope of work
>GMPGuaranteed maximum price, possibly with shared
savings>Cost PlusCost of construction plus fee
>Design-BuildSingle entity responsible for design and
construction>Fast-TrackConstruction begins before plans are
finalized
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Principal Construction RisksRisk No. 1: Cost Overruns
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Risk No. 1: Cost Overruns 6
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Risk #1: Cost Overruns Cause #1: Inaccurate cost estimates7
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Risk No. 1: Cost Overruns [N]either the Architect nor the Owner
has control over the cost of labor, materials, or equipment; the
Contractors methods of determining bid prices; or competitive
bidding, market or negotiating conditions. Accordingly, the
Architect cannot and does not warrant or represent that bids or
negotiated prices will not vary from the Owners budget for the Cost
of the Work or from any estimate of the Cost of the Work or
evaluation prepared or agreed to by the Architect.AIA Form
B141-2007, Standard Form Agreement Between Owner and Architect
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Risk #1: Cost Overruns Cause #2: Excessive Changes11
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Risk #1: Cost Overruns
12Cause #3: Project Mismanagement
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At about the time Revel opened April 2, 2012, officials, who
already had the resort carrying $1 billion in debt, would learn
construction cost was over budget and they would need to spend $100
million more than expected, Stogsdill said.Unfortunately, the
general contractor hired to manage the construction of the Revel
made a series of significant budgeting errors that were not
disclosed to Revel until the last minute.
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The report blamedconstant design changes, poor control of
budgets and mismanaged contracts for the project mishaps.
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Risk No. 1: Cost OverrunsAddressing the RiskEstablish a firm
budgetIndependent cost estimates as design progressesAdd and delete
alternativesPeer review of designPreconstruction servicesProactive
owner oversight BIM
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Principal Construction Risks Risk No.2: Defects, Failures And
Non-Conformities
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All Construction Claims70% Defects in exterior envelope (roof,
faade, below grade)20% Structural defects10% All others (payments,
liens and delays)18
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What Are Construction Defects?Deviations from plans and
specifications
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What Are Construction Defects? Code violationsDiminished useful
lifeFunctional defectsAny element of project does not work
properly, or at all
20-Engineering News Record via Associated Press, 11/28/2016
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What Are Construction Defects? (cont)Failure to meet performance
criteriaSudden Failures
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Hyatt Skywalk Collapse 198122
Before
After
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Big Dig Ceiling Collapse 2006 23
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Minneapolis Bridge Collapse 2007 24
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Mecca Crane Collapse, 201525
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Typical Causes Of Construction DefectsDesign does not workPoor
detailing and draftingDefective materialsSubstitution of inferior
materialsPoor workmanshipDeficient inspections
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Owner Recourse Against Designer for Construction
DefectsProfessional negligence or breach of contractLiability
limitations in professional services contractSufficient funds or
insurance
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Professional Liability InsuranceClaims made policiesDefense
costs reduce coverage
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Owner Recourse Against Contractor For Construction
DefectsCommercial general liability insuranceBusiness risk
exclusion
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Builders Risk InsuranceCovers risk of loss/damage to
construction work during the construction process
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Principal Construction RisksRisk No. 3: Differing Site
ConditionsConditions of site, soils or subsurface that the Owner
did not disclose and which the contractor could not reasonably have
discovered or anticipated itselfAddressing the RiskThorough
geo-technical investigationsSpecific disclaimerRisk sharing
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Principal Construction RisksRisk No. 4: Project Completion Is
DelayedCauses of Project DelayIncomplete, inaccurate or poorly
coordinated designsUnforeseen site conditionsDesign revisionsForce
majeurOther Causes
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Injury To Owner From DelayLost product revenuesLost rentalsLost
use of facilityLiability to contractor for delay damages
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Contractor Delay DamagesExtended equipment rentalStanding by
with idle employeesLabor rate escalationMaterials cost
escalationForced work in winterAcceleration costsInefficiency
costsAdditional overhead
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Project Completion is DelayedAddressing the RiskOwners
pre-construction planningAssure permits are in placeReview design
for errors/constructabilityGeotechnical studiesNo damages for delay
clause Close project supervisionBIM
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Questions?36
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