New York, Ohio Expand Design Build Authority

The New York State Departments of Transportation, Thruway Authority, Bridge Authority, Environmental Conservation, and Parks and Recreation are now authorized to award projects using design build.  According to this This ENR article, "Richard Thomas, DBIA vice president of advocacy, calls the legislation a major victory as New York currently allows design-build only for dormitory construction and, more recently, for emergency infrastructure repairs after Hurricane Irene. He notes that earlier this year Ohio also expanded its use of design-build for certain transportation sector work."

The state will set aside $700 million in order to accelerate capital projects, and the Port Authority of New York and New Jersey is slated to add another $300 million.  A separate $1 billion dollar public-private infrastructure fund is being established.

This added design build authority will be on a short leash;  the program is slated to expire three years after enactment. 

China's Hard Landing?

In the tussle over the merits of stimulus spending Keynesian economists (like Krugman and DeLong) regularly point to austerity measures in Ireland, Spain, Greece, et al. to say "See what a mess austerity gets us into."  They mean sustanined unemployment and meagre growth.  Now we have the editorial board of the Wall Street Journal pointing to China as if to say "See what a mess stimulus spending gets us into."  They mean inflation and imminent bust. 

Some of the figures they cite are impressive:  15% GDP spent on infrastructure in inland areas.  If true, this would be truley impressive.  At the height of the construction boom in 2006, total construction in the U.S. was about $1.2 trillion, or roughly 9% of GDP. 

No matter what, watching economic developments in China for the next few years promises to be interesting.

PPP Policy Research?

In the recent Rolling Stone article on Rick Perry that is making the rounds on social network sites, there is a discussion of the Trans Texas Corridor, which eventually was pared back to three smaller highway projects, developed as PPP by the state and Cintra (see pp. 4-5).

Is anyone aware of any public policy research looking into how some of these PPP deals are working out in practice, and if they are a good deal for the state, or not? 

This would be a good place to share some of this research.

An IPD Primer

By Michael S. Zetlin, Partner, Zetlin & De Chiara LLP

As seen in Real Estate Weekly, October 12, 2011

Michael S. Zetlin, Esq.

Construction is a high-risk, high-reward industry. The traditional design-bid-build method often fosters conflicting interests and clashing incentives amongst the project participants, the owner, the design team and the construction team. The business independence of each participant can create an inherently adversarial environment, potentially impacting the productivity and efficiency of construction, which, in turn, can lead to project delays, cost overruns eroded profits, and costly claims. IPD breaks the traditional mold by financially incentivizing a collaborative approach to a construction project, an approach that paves a path to "we all win or we all lose." Project success becomes the mantra for all of the IPD participants.

Collaboration between the owner, the design team, and the contractors is not a novel idea. In the 1980s the concept of "partnering" was introduced to the industry. The partnering process was designed to allow the owner and contractor to reach a set of mutually agreed upon objectives and goals through a series of workshops. Partnering focused on developing inter-organizational trust and communication as the foundation of the cooperative relationship between owner and contractor. For various reasons, however, the partnering initiative never caught on in the United States.

Partnering floundered because of its inherent flaws: it was non-binding and lacked teeth. If a participant decided to reject the "we will all play nice together" notion or some project predicament harbingered some meaningful cost implications, the relationship defaulted back to the contractual rights of the parties dictated by the Owner–Contractor/CM agreement and Owner–Architect/Engineer agreement. The internal analysis of the parties then reverted to the inquiry: "Is my economic interest served best by asserting a claim, blaming others for the difficulty to avoid a painful financial hit?" IPD has the potential to erase this last question from the thought process, impelling the parties towards collaboration by having all parties share gains for success and losses for cost overruns.

IPD is intriguing because, through contractual arrangements of risk/reward incentives, often accomplished in a single agreement executed by the IPD participants – Owner, Contractor or CM, Architect/Engineer and, perhaps, significant subcontractors and subconsultants – risk/reward is shared among the participants. If an alleged design error causes some added costs to the project, the costs are shared as a defined percentage: no claim. If the GC/CM commits some construction snafu, the costs again are shared: no claim. If the project meets or beats project goals, which can go beyond budget and schedule and include things like safety record, design recognition, customer experience, etc., financial reward is shared.

Since with IPD everyone has skin in the game, the IPD contractual agreement typically modifies the conceptual approach to the phases of design and construction. On a design-bid-build project, a contractor may never have a hand in contributing value engineering concepts or constructability reviews during the design process. Likewise, an architect or engineer may never participate in a cost estimate meeting with a contractor. On a project utilizing IPD, however, both the design professional and contractor are strongly encouraged, and may be contractually obligated, to participate in the conceptualization of the project with the owner. All of the IPD participants can help develop design schemes, performance criteria and scopes of work, and even develop a collaborative budget for the construction costs. Then, during construction, all of the participants again collaborate in the decision-making process when issues arise relating to scope, budget, material purchases, schedule, conflicts, etc., issues that might impact the cost, timing or other goals of the project.

Although IPD is still in its infancy, we are seeing optimism that this new paradigm will work. Owners are signaling that they are ready for a shift, and contractors and design professionals seem willing to become real partners with owners to help ensure a successful project. We have already participated in successful IPD projects and see that it can work, with the right mindset of the participants and the proper structure in place. What makes IPD attractive is that it not only intends to create an environment where decisions, solutions to problems, and behaviors are driven by a shared set of goals and objectives, but when fully embraced, IPD drives a behavioral shift towards setting performance targets that can far exceed business-as-usual results.

Time Extensions Now Both Defensive and Offensive

Ever since the California Supreme Court handed down its decision in Peter Kiewit Sons' Co. v. Pasadena City Junior College Dist. (1963) 59 Cal.2d 241, California has maintained a strange dichotomy regarding time extension requests and liquidated damages that made some practical sense, and was a boon to contractors everywhere. The dichotomy provided: if a contractor wants a time extension, it must adhere to the contract's procedures and timely and properly submit one. However, an owner may not assess liquidated damages against a contractor for delays that are actually the owner's fault, REGARDLESS of whether or not the contractor ever submitted a timely and proper time extension request for these delays. The dichotomy made sense by depriving a careless contractor of affirmative claims for time when the contract's provisions are not followed, but not awarding the owner a windfall (LDs for delays that are actually the owner's fault) simply because the contractor neglected to timely file a time extension request.

That dichotomy came to an abrupt end this week, with the California Court of Appeal's decision in Greg Opinski Construction, Inc. v. City of Oakdale. The Opinski court acknowledged the rule established in Kiewit, but concluded that a 1965 amendment to California's Civil Code overturned the holding in that case. This conclusion came as a surprise to the many trial and appellate courts that have followed the Kiewit doctrine in the last forty-seven years---apparently, no one but this panel of the Court of Appeal realized that Kiewit had been superceded two generations ago.

Opinski makes more sense when viewed in the context of the overall approach of California courts to contractor's claims. In California, as in the Federal Court of Claims, contractors built a favorable body of caselaw from the 1960s through the early 1980s on topics ranging from weighing the propriety of termination to waiver of contractual change order procedures. Many of these cases are relied on to this day by contractors' attorneys. But starting in the mid-1990s, in both California and the Federal Court of Claims, the worm started to turn. Courts have insisted on more rigorous (occasionally, strict) adherence to contractual change provisions, and have shown greater willingness to strip a contractor of otherwise valid claims based solely on procedural defects. Contractors still win the occasional victory (Dillingham-Ray Wilson v. City of Los Angeles comes to mind), but the tide has clearly turned.

Residential Construction and Government Spending Lagging

This statistic shared courtesey of Brad DeLong (macroeconomist at Berkley).

Looking for Good News in Bitter Times

Here is the data for Total value of construction put in place, 2002-2010.   The latest figures available, for July 2011, show not much progress yet, with annually adjusted rate of $790 Billion; still below the low water mark set in 2010. 

It's not like there isn't work to do.  Construction could be leading the economy out of the doldrums if only Congress would get on board with tackling deferred maintenance and funding normal upgrades of our national infrastructure; if only Congress showed some leadership and vision in laying the foundation for the new infrastructure we'll need this century.   But instead of exhibiting some good old fashioned can do spirit, politicians are trying to outdo each other in how to further dismantle infrastructure spending.  It's enough to make a body depressed. 

In this sea of negativity, it's good to periodically take stock of the good things that are happening.   So here is a short list of accomplishments for the last decade. 

Can someone take a shot at expanding on the progress in construction?

It's Summertime: Another Contractor Stung by PWL in PPP

In Hensel Phelps Construction Co. v. San Diego Unified Port District (published July 26, 2011) the California Court of Appeal handed a prevailing wage bill to the general contractor of a $350 million hotel development project.  Odd, you might say, because the project seemed rather private.  The Port leased land on the San Diego waterfront to a developer (OPB) for construction of a hotel.  The lease term was for a long time, 60 years, and at the conclusion of the lease the land was to be delivered free and clear of the improvement.  In the meantime, the developer was to pay rent of $4.5 million per year ($2.25 during construction), plus 7% of room rental proceeds, 3% on food, and 5% on drink.  OPB hired a developer, who in turn hired Hensel Phelps Construction.  They apparently did not pay prevailing wages and the carpenters and laborer unions sued.

In making these wage and hour determinations, courts usually look to three things: 1) the nature of the ownership of the project, 2) whether the project is funded in part with public money, 3) and whether the project serves a public or private purpose.  See my recent article in The Procurement Lawyer.  In this case, none of these criteria jump out at you.  Although the Port owned the ground lease, the hotel project in this case was undoubtedly privately owned.  Similarly, although a hotel in the area would provide a shot in the arm for the neighborhood, operation of a private hotel does not seem particularly public in nature.  Finally, the Port District did not directly contribute any funds to the project. 

However, there wasa strong interest by the Port to have a hotel developed on the property.  Presumably they felt this was the highest and best use for the general development of the area.  In that sense, the project had a public purpose similar to the City of New London’s purpose in the Kelo case (U.S. Supreme Court takings case).  The Port District in this case attempted for many years to find a developer to build a hotel.  The Port provided specifications for the project.  In effect the Port lent the project a public air by taking such a keen interest in how they wanted the property developed. 

Ultimately, however, the case turned on statutory interpretation on the use of public funds.  The California Labor Code provides that prevailing wages must be paid on any project that is built in whole or in part with public funds, and the statute specifically provides that forbearance of rent counts as public funding.  In this case the developer advised the Port up front that the project did not pencil with the initially negotiated rents unless some of the rent was forgiven.  The Contractor and Developer argued that the lease agreement simply restructured the reasonable lease payments:  there was no lease obligation to be forgiven before the lease was signed and so this shouldn’t count as a “forgiving” of rent under the statute.  This argument was rejected. 

The moral of the story is, if a public entity has a strong interest in how a project is developed this may persuade a court that the project has a public character, even though it may be strictly private in ownership and use;  above all, however, pay very close attention to the applicable prevailing wage statutes in your jurisdiction whenever a public entity is involved, even if very periphorally.  One can’t tell from the opinion who will ultimately get stung here by this unexpected cost—suffice it to say it will not be pleasant. 

Brownfield Bloom and Nostalgia

My legal career started as a deputy prosecuting attorney in King County Seattle.  At the time I lived on a sailboat on the south side of Lake Union and conducted trial strategy meetings during Tuesday night beer can races.  The area between the south end of the lake and downtown, pictured here, has undergone many changes since then. 

Here is an article  in the WSJ about the 6.4 million of office space that Paul Allen's Vulcan has developed in this area since 2004.   If anyone has knowledge about this brownfield development, that would be an interesting discussion for a monthly call in meeting, hopefully for more than those of us who used to live on a boat on Lake Union.  

Alternative Energy Funding

Interesting article from May 2011  in the WSJ discussing financing of large alternative energy projects. 

To date the DOE has approved financing for 27 major projects, totaling 30 billion in loan gauarantees.  Of these, 16 projects have been funded, including Brightsource's  Ivanpah project near Las Vegas, currently being constructed by Bechtel.  The Brightsource Ivanpah project is the largest solar thermal project currently under construction worldwide and it will nearly double the amount of solar thermal energy being produced today.  The 845 MW Shepards Flat wind farm in Oregon's Columbia River Gorge is sponsored by GE Energy Financial Services and is funded with a mix of bonds, floating loans, and equity capital, with an 80% DOE loan guarantee.  In the meantime, developers of Cape Wind (the irritant of Kennedys) are looking for a 20 percent equity stake from Barclay's Investments and an 80 percent loan guarantee from the DOE's program for innovative technologies. 

As government support for these alternative projects is bound to wane in the current budget picture, the question will be whether enough of these projects currently underway can prove themselves so private capital will step in to finance future projects without, or with fewer, government loan guarantees.  Let's hope so.

These projects are dominated by technology and financing.  Nevertheless, there is a valuable role to be played by those of us versed in construction delivery models in allocating the risks and responsibilities between the parties.

About Trains

Trains are great.  On my way to the ABA Forum planning retreat, Chicago O'Hare was shut down and disrupted for hours.  So instead of arriving in Albany, NY at 7:00 p.m. I wound up at Newark, NJ at 5:00 a.m. on 4 hours sleep in 48 hours.  I tried to rent a car for the three hour drive up to Lake George, but they wanted $800 for the week . . .and I revolted.   I walked across the track and took the train to New York's Grand Central, and transferred to "The Adirondak", train 69 heading for Montreal, at 8:15 a.m.   I thoroughly enjoyed the four hour trip up the Hudson river valley.  It made me wonder why we don't ride the train more often. 

Friday, July 1, 2011 was opening day for the $35.5 billion Bejing-Shanghai bullet train.  The plan is to run 90 trains per day each way, meaning a train will leave every 10 minutes for 16 hours per day.  Wow!  The initial forecast is to move 180,000 passengers each day (about half of the BART system in San Francisco, for example).  At 819 miles, this is the longest high speed rail line in the world. The trip will cost $86 for coach, one way, about half the cost of  flight.   The trip takes less than five hours, no longer than driving to the airport, waiting, and getting to downton Bejing or Shanghai at the other end with scrunched knees; or are Chinese airline coach seats better than ours?

China is undergoing a steel rail boom.  Total investment in new rail lines has grown from $14 billion in 2004 to $26.2 billion in 2007.  In response to the global economic recession, while we wring our hands and shy from increased government involvement,  the Chinese government has accelerated the pace of HSR expansion to stimulate economic growth.  Total investments in new rail lines including HSR reached $49.4 billion in 2008 and $88 billion in 2009. In all, the state plans to spend $300 billion to build a 25,000km (16,000mi) HSR network by 2020.[1]  Jobs created have been 100,000 per year. 

Simens, Bombardier, and Kawasaki are all reported to be involved with technology transfer agreements.  Chinese indigenous technology is quickly catching up, and making its own innovations.  The projects are funded by state owned banks and financial institutions, with the money going to the Ministry of Railways and local governments.  To date, none of the lines are showing a profit. 

Here is a map of the planned railway system. 

If anyone has experience with major project delivery agreements in China, that would be an interesting post for the Triclinium. 

In the meantime, California is working on its own 800 mile high speed rail line from Los Angeles to San Francisco, with service to be expanded to San Diego and Sacramento.  The Chinese are in the hunt to get involved with their surplus cash and rapidly acquired technological expertise. 

Are we paying attention yet?
____
fn 1.  This is a very substantial Wikipedia entry on high speed rail in China.  Who does this stuff?!

All Things Shining at the ABA Forum

This past week our Forum Officers, George Meyer, Jim Schenck, and Andy Ness, presided over the ABA Forum on Construction Law planning retreat held at The Sagamore Resort on an island in Lake George (the lake named after George) in up-state New York. They were joined by the Governing Committee, the editor and assistant editor of the Construction Lawyer, the editor of Under Construction, the Division Chairs, our ABA staff person, spouses and children. Past chairs Robbie MacPherson and Adrian Bastianelli lent their experience to the proceedings.

The planning retreat is an august gathering in June of individuals who have each put in years of service on behalf of the Forum. We are all beneficiaries. Without their tremendous efforts the Forum would not produce such high quality educational programs and publications, the construction bar as a whole would hold its head less high, and our professional friendships would be more local, more isolated. Our professional lives would be less idealistic, more impoverished. But why have these talented, energetic, and successful individuals chosen to donate thousands of hours of non-billable time on behalf of the Forum. Why should you become involved?

In their recent book “All Things Shining,” Hubert Dreyfus and Sean Kelly, professors of philosophy at UC Berkeley and Harvard, advocate for the Homeric world view that we are at our best when we respond to the virtues outside of us, when we align ourselves with the gods, if you will. It’s not all about us! This world view is marked by a deep sense of gratitude for the good things that happen to us, and an appreciation that we can never fully take credit for our successes, just like our failures involve forces and constraints outside of our control. It includes a recognition that when we are at our best, the virtues carry us along; they are not fully of us.

As individual lawyers we work hard at marketing, advancing our clients’s best interest, making our firms profitable. Sometimes we are lucky in the clients we have, sometimes not; sometimes we are lucky in the facts we have, sometimes not; sometimes we are fortunate in the judgments we receive, sometimes not. None of this is entirely within our control. Similarly, the shining virtues embodied in the Forum, Homer would say, exist somehow outside of ourselves. When we align ourselves with those virtues—scholarship, sharing knowledge generously to advance the profession as a whole, taking time to foster a deep, meaningful, and lasting network of professional friendships, mentoring younger lawyers (whether they are at our firm or not), providing opportunities for all—then we are leading virtuous professional lives.

Does our involvement in the Forum increase our billable hours? No it does not. Does it lead to enhanced professional competence, visibility, reputation and referrals? Yes it does; but that is not the ultimate point. The Forum is a vehicle for aligning ourselves with those shining professional virtues outside of ourselves. As Adrian Bastianelli said in his tribute for Terry Galganski, and as Terry advocated, the Forum helps make insurance law sexy. To close with a paraphrase of Adrian, long live the shining virtues of professionalism, long live the Forum. Indeed!

Magna Carta Day: Nearly 800 Years of English Law!

“Given by our hand in the meadow that is called Runnymede, between Windsor and Staines, on the fifteenth day of June in the seventeenth year of our reign [AD 1215],” the Magna Carta. Courtesey of Eugene Volokh at Volokh Conspiracy

Project Delivery Trends

The June 2, edition of ENR.com has rankings of the top 100 design-build firms and top 100 CM-at-risk firms. Virtually identical 2010 volume of $78.3 billion is reported for design-build firms and cm-at risk firms. This reperesents an almost identical decline of 12% in volume from 2009, and a 20% drop in volume compared to 2008 for each type of firm .

The article notes a trend among owners towards traditional design-bid-build in order to take advantage of the competitive bid environment. Collaborative models face a particular challenge for winning over owners in such an environment.

I wonder how closely this equal distribution between design-build firms and CM-at-risk firms corresponds to actual delivery models; i.e. are all project done by the nominal D-B firms actually D-B, or do some of those firms undertake projects with CM-at-risk, or traditonal D-B-B?

Joint ("Extra") Call With Division 9

Joe Kovars and Division ("9 Specialty Trade Contractors and Suppliers") have invited us to participate in their monthly call in this month, June 15 (noon EDT), because they will be discussing integrated project delivery from the subcontractor standpoint. Here's a rough preliminary outline of their planned discussion:

I. Owner/General Contractor Perspective
A. Intro to IPD
B. Risk-sharing and profit-sharing features
C. Benefits from owner’s viewpoint
D. How the Owner/GC views the Trade Partner

II. Trade Partner (Subcontractor) Perspective
A. Benefits to Subcontractor
B. Detriments to Subcontractor
C. What is done differently from a traditional project?
D. Handling claims

III. Questions

And . . . they are looking for a volunteer from Division 4 to present on Section I. This would entail providing an introductory overview of IPD from the Owner/GC point of view, 10-15 min. Please contact me no later than Monday 6/6 if you are interested: first one to the post gets the glory!

Our regular Division 4 call will be at noon EDT, on June 28, 2011. Joaquin Hernandez is looking at the new Forum Data Base and he will educate us on what's there from a project delivery standpoint, how useful is it, and how do we get at it. You can struggle through tediously on your own to learn this, or tune in to Joaquin, and get up to speed in an hour.

Best to all,

Roland

CA Court Applies Broad Interpretation of “Construction” to Foil Attempt to Exempt Roof Construction from Public Works Prevailing Wage Statute

Prevailing wage has its champions and its benefits. It is also expensive. For this reasons, private developers generally try to avoid paying prevailing wages on projects. [Note: I don’t have the evidence for that last statement; what percentage of construction work these days is “prevailing wage”?] Sometimes, public entities try to get in on the act.

Oxbow Carbon & Minerals, LLC owned a long term lease for a warehouse on Pier G at Long Beach Harbor, previously used as a holding pen for petroleum coke. To accommodate top loading of the coke, the warehouse previously had no roof. But the coke operation was shut down by air quality regulations in 2001. In 2005 the City of Long Beach and Oxbow amended the lease. The amendment allowed for $2.258 million in rent reimbursements to permit Oxbow to construct a new conveyor to move the coke. Upon completion of the conveyor, title vested in the City. Oxbow executed a separate contract for construction of a new roof with a contractor using non-union labor.

The roofing contract was challenged by the local iron workers union. Long Beach and Oxbow presented a unified front arguing that the roof was a separate contract, entirely paid by private funds, and thus not subject to prevailing wage laws. This argument was rejected by the DIR. Although there was no dispute that the roof was paid entirely with private funds, the DIR determined the roof contract was a public work because the conveyor and roof were part of one organic project partly paid for with public funds (the conveyor). Therefore the entire project, including the roof, was subject to prevailing wage laws. Oxbow appealed to the Superior Court, and then the Court of Appeals . . . and came away 0-3. Moral of the story, don’t play games with the DIR and prevailing wages.

Oxbow Carbon & Minerals, LLC v. Department of Industrial Relations 194 Cal. App. 4th 538 (certified for publication 4/19/11)

Welcome to the Triclinium

People, programs, publications, project delivery, monthly call in meetings, great presentations, mutual encouragement, networking, resources, and camaraderie. That's our goal in Division Four: Project Delivery Systems.

For the next two years I will try to use this site as a place for you to check in on upcoming call-in meetings, report on some Forum business, and share ideas that I hope will not bore, and be of use on occasion.

If you have items of interest to pass along to the Division, shoot me an email and I will post here. If you have any interest to contribute your own post, let me know and we will get you access. Hopefully, many of you will contribute with your comments. I will notify the list serve for the Division when a new post is up.