New Study Has IPD on Top: But Not as Dramatically as Advertised in Some Quarters

In their focus on public-private partnerships, Douglas and Sykes of Farella Braun + Martel tout 30% life-cycle savings for P3 concessions over traditional delivery models.  This claim is based, in part, on a study from a Bay Area Council white paper: "Framework Conditions for Foreign and Domestic Private Investment in California's Infrastructue: Seizing the P3 Opportunity."  The council updated their white paper in 2012 with a report entitled "Accelerating Job Creation in California Through Infrastructure Investment."   There, the council cites the Long Beach Courthouse study which promised 25% life cycle cost savings, and a pre-bid study prepared by the joint venture team for the Presidio Parkway in San Francisco, which promised a 23% savings in construction costs over a traditional delivery method.

How reliable are these reports of 25% savings for construction and life-cycle costs.

On December 17, 2013 Julia Holden-Davis gave a presentation to Division 4 members regarding a recent study by Mounir El Asmar, professor at School of Sustainable Engineering and the Built Environment at the University of Arizona, Awad S. Hannah, professor in the College of Engineering at the University of Wisconsin-Madison, and Wei-Yin Loh, also professor at the University of Wisconsin-Madison.  The study, Quantifying Performance for the Integrated Project Delivery System as Compared to Established Delivery Systems appeared in the November issue of the Journal of Construction Engineering and Management, Vol. 139, Issue 11 (Nov. '13).  Unfortunately the article itself is behind a pay-wall.

Julia purchased a copy and studied it.  Here is her excellent summary.



A few points to note:

The report compared 12 IPD projects to 23 non-IPD projects, mainly in California and the mid-west.  The authors looked at 304 variables, including, of course cost and schedule.  The study suggests caution is in order when evaluating hyperbolic claims of "faster and cheaper."

 Asmar/Hannah/Loh conclude:

1. There was no significant cost difference between IPD and other delivery systems (CMR, DB, DBB).  The authors indicate that this confirms prior literature.

2. IPD projects slightly faster (but not dramatic)

3.  IPD'ish projects fared best of all in many of the metrics used.

4.  IPD had best results for quality, but no significant difference in latent defects.

5. The overall user experience with IPD was qualitatively better.

"Americanizing" P3.

My posting of the Douglas/Sykes article, wherein I remarked on the three year negotiation period for the P3 at the Rialto water and wastewater system, sparked the following email exchange.

Scott Douglas: 

“You raise a good point re the 3-year negotiation period on the Rialto deal.  The promise of P3s is that projects can get built quicker, cheaper and better.  Once P3s become more common, the negotiation period should shorten.  And if the folks at Rialto had gone a traditional, public-funding route – assuming it had the financial capacity to raise funds for the project – it may have been quicker from the time it was initially conceived until completion, but it would have cost the city more – a properly structured P3 deal should result in overall reduction in lifecycle costs by 15 to 30%.  Clearly, there needs to be further development of P3s in CA and elsewhere in the US – the industry refers to this as “Americanizing” P3s – but P3s are needed here to address our aging infrastructure and the new infrastructure needed by the public.”

Roland Nikles

“Have you run across some studies on the savings over life-cycle costs that seem solid.   They did a pretty well documented report on the Long Beach Courthouse, but reading through that report the "science" of it is pretty thin.  When public entities outsource things like water and wastewater systems, some of the "savings," I assume, will be attributable to lower labor costs--non-union, no pensions--which raises larger issues.  Same thing for privatizing jails, as the Reason Foundation suggests;  and there you have the additional issues of do we want private corporations having control over such things as parole and health care in prisons? 

I think it's important to get the metrics on this right, because if there truly is a 30% life cycle savings, public construction should make a wholesale shift towards PPP right now.  No?  But before we make such a wholesale change, we should be paying attention to the metrics and make sure they are right.  I think a lot of the "savings" talk comes not from professors at Universities, but from companies who want to do these projects and their consultants.  

We are concerned about contractors hiding pools of profit in hard bid or GMP projects.  I think we can't begin to imagine the hidden pools of profit that can sneak into a 30 year P3 concession, and the ultimate cost differential for taxpayers.”

Today, at the annual meeting of the Western Region of the DBIA, I listened to Sandra Beck, an architect with the building program department at the University of California.  They have significant experience with Design-Build at this point.  One of the points she addressed was “the myth” that design-build is per se faster, better, and less expensive.  She said “You get what you pay for” and that she views savings that can be achieved as a nuance. 

The situation may be different for 30 year concessions.  If awarding concessions for the design, construction, operation, and maintenance truly can achieve the large savings that some promise, we should confirm this ASAP and get on with making the change. However, my guess is that “Americanizing” of P3 will develop slowly.  

Who will gather and keep the metrics?

Litigators Adding Value to the Economy

I always marvel at how the economy is a boot-strap operation.  As pointed out in the Douglas/Sykes article in our last post, economists for the AGC tout how for every dollar spent on construction, $3.4 dollars are added to the GDP.  A multiplier of 3.4 for construction ... not bad.

Well, that's nothing.

Consider the case of Muniz v. UPS, decided by the 9th Circuit on December 5, 2013.  Muniz sued her employer, UPS, for gender discrimination.  She was demoted by two classification levels.  Her complaint alleged damages in excess of $25,000, and the jury granted her wish:  she recoverd $27,280.  Her lawyers submitted a fee request for $1.9 million, and the court awarded them $697,971.80 in attorneys fees.  Of course, that's just one half of the equation.  UPS's lawyers, Paul Hastings, don't come cheap.  Let's call it another million, just to be conservative.  And this doesn't count the appeal.

So the $27,280 lawsuit gave rise to economic activity in excess of $2 million ... a multiplier of 74!  Now there's a boost to GDP worth shouting about.

Farella Braun's Focus on P3's, Part II: Sales Lingo, War Stories from the Rialto, and "Best Practices" Too

Scott Douglas and Jeffrey Sykes of Farella Braun + Martel have their second installment on Public Private Partnership, published in the Fall edition of the California Public Law Journal, vol. 36, No. 4, p. 38 (2013) [the link is to a more user friendly site].  For Part I in this series see our earlier review here.

Part II  has three parts:  (1) Pros and Cons of P3's--although this is mostly pros; (2) a recent "success story", the City of Rialto's 30 year concession for a municipal water and wastewater treatment system; and (3) P3 "best practices."

Part one is a useful run down of all the buzzwords used in selling P3's.  Take a look at the footnotes for some good references on P3 data in the UK, Canada, and Australia.   The article raises some unanswered questions.  For example, one of the key selling points is speed of development;  however, three years is cited as the time it took to negotiate the $176 milllion municipal water and wastewater system in the City of Rialto. With traditional project delivery, the city can hire an engineering team immediately with standard agreements, and while the design is completed the city can arrange it's bond financing, and contractors can be selected with competitive bidding using standard form agreements.  It's not clear that a 3 year process to line up a P3 agreement would be particularly faster.  A P3 converts a pretty straightforward construction project into a very complicated financing deal.  Maybe it can save time and money, but it's unlikely that a smallish city will have the expertise to evaluate how good a deal they are getting, and it's not intuitively obvious that it will save time and money.    

Take a look at the "best practices" section, it's very good.

Food for Thought: How Do We Handle Change Orders in IPD?

Now that Thanksgiving is over, it's no more food for thought, and back to thought for food!  

I'm working on revisions to the Consensus Docs 300 Agreement for integrated project delivery and am thinking about how to handle change orders in that Agreement.  

The document includes the following structure in broad strokes: 

• The Owner establishes the program, including an "Allowable Cost" and enters into a single integrated agreement with the architect and contractor at the outset of the project.  Everybody signs one agreement.  Major trade contractors are brought on board early and may sign joining agreements.  Together they form and IPD Team
• The IPD Team undertakes a validation study of the owner's program and comes up with an Expected Cost for the Project.  
• The Core Group (everybody is equal, but some are more equal than others) establishes a Target Cost to shoot for during the design process. 
• The Core Group establishes a financial incentive plan to get everyone collaborating in a feel good manner towards the Target Cost.
• Everybody uses Target Value Design and innovates to drive the cost down towards the Target Cost.  
• At some point before start of construction, and before financial close on the construction loan, the parties agree on an Estimated Maximum Price.  This is to put the bankers at ease. 
• The EMP may or may not be binding, i.e. like a GMP.  If it is not binding, the parties will have their profit/fee at risk to cover overruns--but they will be paid the Cost of the Work no matter what (i.e. owner is ultimate guarantor if the wheels come off).  The EMP will usually be higher than the Target Cost, but lower than the Expected Cost, and lower than the Allowable Cost. 
• A Risk Pool plan will establish the goals of profit participation (pain share/gain share)

So this is where the change order question comes in.  The current CD 300 has a changes provision that reads very much like a GMP contract changes provision.  I.e. every time the owner twitches and it looks like there is an impact on costs, there is a change order request.  However, this does not really seem appropriate for an integrated, collaborative agreement outlined above.  

The contractor will be paid its cost of the work for any change in scope, but there is the issue of how much the Target Cost, Expected Cost, EMP, or Allowable Cost should be adjusted--or if they should be adjusted.  One or all?  This matters because the Target Cost and Expected Cost will be used to determine the pain/gain share.  If we monkey with the work that makes up the original Expected Cost it will be difficult to measure how much innovation has happened and how this should be rewarded. 

It's not obvious how to articulate this in the agreement.  

• Allowable Cost:  this should not usually need modification, assuming the Expected Cost and Target Cost are significantly lower than the Allowable Cost the Project will still be completed within the Allowable Cost.
• Expected Cost:  in the case where a change does not exceed the “cost savings” that has been achieved from the original Expected Cost, no adjustment to the Expected Cost should be required.  i.e. no need to automatically change the Expected Cost if we are still below the original Expected Cost.
• EMP:  same rationale comes into play; if the IPD team has innovated savings, an owner change that spends some of these savings by adding new scope should not necessarily result in an increase of the EMP.  Does this depend on what the anticipated cost was at the time the EMP was set? 
• Contractor’s and architect’s fee:  if fee is originally set on the expected cost, the fee increases/construction dollar in ground as the target cost is lowered and achieved.  Should the contractor or architect be entitled to new fee if scope is added that moves the cost back up toward the originally expected cost?  Why?  How much?  Contractors and architects, of course, will want to share in the cost savings they helped create that the owner is now taking advantage of.  

Food for thought. 

Happy Thanksgiving from the Division 4 Triclinium.  

We are grateful for your interest in sharing ideas about construction law and project delivery systems.  We are thankful you are reading.  Thanks for spreading the word.  

I'm enjoying the smells of turkey, yams, and pies in the oven, my mother sitting in the open doorway soaking up a sliver of sunshine, my daughter heading out for a walk with her cousin and dog, my wife running herd on all that needs organizing for receiving the rest of the horde later this afternoon.  Life is good and I'm a lucky and happy guy.  I wish you and yours the same.  

Why, Oh Why, Can't We Have Better Metrics? Sales Puffing Division.

Why, oh why, can't we have better metrics from public projects.

Developing good metrics entails some work.  Private owners usually don't have multiple projects to compare, they may want to keep their cost information private, and they don't want to pay to gather meaningful information after the fact.  Once the project is done there is no glory in second guessing that it could have been done better some other way.  So private owners are left to the hype of contractors touting their pet delivery model to gain a competitive marketing advantage.

It shouldn't be that way on public projects.  Universities, cities, states, federal agencies, all should have strong incentives to develop metrics and develop data bases to compare projects and what really works best.  University construction management programs and engineering schools are in a prime position to develop this data.  They should have a mandate and receive funding to do it.  They should compare notes, and they should publish.  It's not happening.   So we are left to the hype of contractors touting their pet delivery model to gain a competitive marketing advantage.

Take the construction of a new $58 million clean technology laboratory building at Washington State University in Spokane.  Dave Harrison, Sr. VP at Skanska, has an article in the Daily Journal of Commerce today boldly claiming how "Design Build Cuts Costs for WSU Lab."   Harrison is an alumni of the WSU construction management program back in 1983 and has had reason to pay attention to the campus.

Here's Harrison with the wind-up:

Fortunately, we’re seeing some of the institutions in Washington’s university system start to turn to construction-delivery methods that align with their goals better than the traditional design-bid-build model. This is especially notable at a time when every dollar of public spending is under scrutiny.  Fortunately, these construction methods can also deliver the best value to universities.   A tremendous example is about to get under way at Washington State University. Together, with LMN Architects and other members of the project team, we’re preparing to deliver the new Clean Technology Laboratory Building. ... 

I must say, with that headline announcing cost savings for design-build, and the breathy introduction, I'm looking for some hard data here.  Something more than sales puffery.  We're not getting it ....

In the past, an architect would be retained by the school, designs agreed upon and then handed to the selected contractor to execute. That system often led to conflicts regarding designs and how to execute them, putting all parties at a disadvantage as they scramble to build lines of communication, slowing the entire delivery process. ....  For the clean-tech building, WSU is utilizing design-build and it will make a significant difference for their project, helping head off some of the traditional construction trouble spots. By working together as one team, the contractor, architect and key engineering partners can identify constructibility issues in the design well before they become an issue in the field.   This means fewer uh-oh moments where a contractor has to tell an architect and a client that the design they each love needs adjustment. Instead, we are working together to make sure everyone is on the same page before a shovel ever hits the ground. 

It’s easy to see how working this way has the potential to speed up the schedule. It also gives everyone from the board of trustees to taxpayers peace of mind that they are getting the best value for their dollars.  ....  

In other words, hire us and trust us!

Alternative delivery methods have been put to use at the University of Washington as well. The GC/CM method was used to deliver the renovation of the Husky Union Building last year. That project required a significant amount of preservation of the original building. Additionally, by bringing more parties to the table to plan, we were able to minimize campus disruption while the project was under way. GC/CM also allowed us to significantly increase the efficiency of delivery. 

What can work at the UW and WSU can work in other places. All universities should consider the value of alternative delivery methods and see how they can be put to use for the benefit of their campus communities. This is especially true of public institutions at a time when funding is as tight as ever.  Schools, contractors, architects and other stakeholders all stand to gain from the right kind of construction-related collaboration. 

Hire us and trust us.  Skanska, of course, is a great builder and they'll do a good job no matter which delivery system a University may employ.  Will the promise of cost savings and schedule savings be realized in this case?  Or are these just noises from a good contractor touting the latest delivery model to get a leg up in marketing for the next job?  How will we ever know?

Washington State University in this case, and public owners on all jobs, should gather the data, they should share it, and they should publish it. Put those construction management departments to work to study these projects and separate the hype from reality.

Viking Stadium Reaches Financial Close with GMP for Construction

The new stadium for the Minnesota Vikings starts construction this week.   Funding sources for the $975 million project include the state ($348 million), the city of Minneapolis ($150 million) and the Vikings ($477 million). 

M. A. Mortenson has signed a GMP contract in the amount of  $763 million.  The team has announced it plans to close on financing for its share of the project cost before the end of November, and the state will conduct a bond sale in January for its portion.  The project is scheduled for substantial completion in July 2016.  If we care to count, this represents $24.6 million of work in the ground every month over the 31 month schedule!

Mortenson plans to self-perform $110 million of concrete work (~14% of budget).  Mortenson's fee at $12.5 million is a slim 1.6% of budget.  The local MBE/WBE commitment is 20 percent. 

The roofing steel is special 65 Grade steel to be manufactured in Luxembourg.  The balance of the steel order (~7,000 tons, 65%) is domestic.

Mortenson and it's construction partner Thor Construction claim they spent 16,000 hours in pre-construction.  The request for proposal was issued in late September 2012, and Mortenson/Thor were selected on February 15, 2013.  In other words, pre-construction involvement by the contractor was not that heavy (~8 persons over a year).  Mortenson, founded in 1954, is one of the country's larges privately held companies, with 2011 revenue of $2.47 billion (Forbes)

The Architect for the Project is HKS Architects.

Young Communists Grappling with the Toyota Production System in Nikita Krushchev's Russia

I'm reading "Red Plenty" by the British writer Francis Spufford.  It's about the mid-20th century moment when the Russians truly believed, for a moment, that their socialist vision of plenty might actually come to pass, that they might overtake America and sit on top of the heap.  It vividly portrays real and fictional characters grappling with some of the problems of pulling this off.  

Turns out some of what they were grappling with resonates with our challenge of making construction projects more efficient.  Take this short dialogue;  it's just-in-time delivery, long before the Toyota Production System:

(The scene is a cocktail party.  Two young mathematicians, handsome Valentin and nerdy but enthusiastic Kostya, are chatting up a slightly older, attractive fruit fly geneticist)

Kostya:  'So the economic task is to allocate our limited resources in the most efficient way possible.  The socialist economy tries to do that by pushing factories to do more every year.  But here's the catch.   We don't want them to do more.  We really want them to do the least they can possibly do that will still fulfill the plan.  Yet the targets they're given don't make that possible.  The target for a transport enterprise, for example, is given in ton-kilometers.  They're supposed to move the greatest weight they can over the greatest distance they can--which is hopeless, it should be exactly the other way around, so long as everyone who needs stuff moved is happy.  We need new targets.  And luckily, thanks to Valentin's boss, Professor Kantorovich, who is standing just over there, the mathematical means exist to create them.'  

Attractive fruit fly geneticist:  'Not ton-kilometers?  

Kostya:  'No; and not kilowatt-hours of electricity either, or liters of refined gasoline, or square meters of spun nylon.  Did you know that last year more than half of the hosiery delivered to shops was sub-standard?'   

Attractive fruit fly geneticist:  'Let's say that I had an anecdotal appreciation of that fact, from trying to put some on.'  

Valentin:  'Kostya really knows how to talk to girl, don't you think?' said Valentin.  'No, no, go on: league after league of malformed stockings….'  

Kostya:  'The point being that it was incredibly hard for the stores to send the bad stuff back to the knotting mills, because it all counted towards their output targets.  What we need is a planning system that counts the value of production rather than the quantity.'  

And that's what we need on construction projects.  With traditional fixed price contracting,  the schedule of value is like the ton-kilometers of a transport business; like the factory under a quota, individual contractors like the hosiery factory are not easily inclined to tear out and redo defective work; like the goal for the Russian economy, the goal is to produce value.

And so here I will paraphrase for our purposes ….

Attractive fruit fly geneticist:  'The value to whom?'

Valentin:  'Good question,' said Valentin.   

Kostya:  'Not just the value to the [Trade Contractor], or even to the consumer, because that only gives you [low bid fixed priced contracting] again, surging to and fro, doing everything by trial and error.  It's got to be the value to the whole [Project]; the amount it helps with what the whole [project team] is trying to do in [the planned construction] period.   

No, "Competitive Bidding" is not a Popularity Contest, Why do You Ask?

Every once in a while we run across a case in the advance sheets that stands out in its moral clarity, soundness of reasoning, and wisdom of disposition; a case that stands as a beacon of all that is good about the rule of law.  Eel River Disposal Resource Recovery, Inc. v. County of Humboldt  2013 Cal. App. Lexis 894 is such a case.

Eel River Disposal addresses the abuse of a competitive bidding process for a 10-year exclusive franchise to collect and dispose of solid waste in the Willow Creek area of Humboldt County.  Willow Creek is the Big Foot Capital of the world, marijuana country.  We have a friend who teaches cello in the region.  All her students come from parents involved in the marijuana trade; they are the only ones with stable, reliable, and disposable incomes.  The legal no mans land of the marijuana trade makes the culture secretive.  All is not what it seems.  The lawlessness is apparently infectious.

For 37 years Humboldt County had awarded an exclusive franchise to collect solid waste in the Willow Creek area to Tom's Trash.  In 2010 the County elected not to renew the contract amidst findings that Tom's Trash was delinquent in submitting franchise fees and otherwise not in compliance with the terms of its contract.  The Board of Supervisors directed the Department of Public Works to competitively bid a new solid waste franchise for the Willow Creek Area.

The DPW published selection criteria in a request for proposals, with price being the predominant factor for selection.  Four companies responded, including Eel River and Tom's Trash.  The DPW duly ranked the proposals and recommended an award to Eel River:

[I]n the minds of the three members of the review committee …[Eel River] "hit all the buttons."  It not only "scored 100% on the evaluated criteria identified in the RFP," but also offered "the lowest cost to the community and a reasonable cost for adding curb-side recycling availability to the community and even with the curb-side recycling, they are still the lowest cost provider. 

Tom's Trash tied for last place in the DPW's evaluation.

So what happened?  Shortly before the hearing on award of a contract to Eel River Supervisor Ryan Sundberg, whose district includes Willow Creek,  distributed packets to other members of the Board containing letters from residents supporting an award to Tom's Trash.  At the hearing, the board,  without making a finding that dispensing with competitive bidding would be in the public interest, ignored the bidding process and awarded a contract to Tom's Trash.   The county counsel did her best to accommodate the whim of her client, apparently without a word of caution.

Eel River filed for a writ of mandate that the Board had a duty to award a contract to Eel River as the lowest responsible bidder.  The trial court denied the writ application, finding that the phrase "competitive bidding" in the relevant county ordinance did not imply a requirement that the county award a contract to the lowest responsible bidder.

The court of Appeal came out swinging:

 As we shall explain, the trial court's confusing analysis fails to properly inquire into the ambiguity of the phrase "competitive bidding," fails to consider substantial extrinsic evidence bearing upon the meaning of that ambiguous phrase, fails to recognize that section 40059 and 49201, which are both part of the 1989 Act and in pari materia, can readily be reconciled, misapplies Cypress Security and ignores important policies regarding the letting of public contracts and settled principles of statutory construction.   As we shall explain, the court's ruling renders section 49201, subdivision (c) and subdivision (a)(2) of Humboldt Code section 521-6 meaningless and vindicates a grossly unfair bidding process that would invite the very favoritism, fraud and corruption the law relating to the letting of public contracts is designed to prevent.  

It's possible to view this case as "Forget it, Jake.  It's Chinatown," as Shuan Martin (professor UCSD law school) does.  But I think the case is more important than this quip would suggest.

• The case holds the Board, County Counsel, and Superior Court judge accountable, and does so with a very solid explanation of what's at stake with public bidding laws.   It teaches by example.
• The case provides a great review of statutory construction and why these doctrines are more than just words to be employed in rationalizing an outcome.

In California, as elsewhere, there has been a general eroding of competitive bidding standards as public entities have struggled to gain more control over the selection of their contractors for projects.  This sentiment is contributing to the movement towards design-build and public private partnerships.  But this sentiment is also driving more questionable practices like using lease-lease-back schemes to avoid competitive bidding.  If, or should we say when, the legality of lease-lease-back without competitive bidding makes it to the Court of Appeal in California, this decision will be prominently discussed.  

The Remedy

The court's adopted remedy is also interesting.  Rather than hold "the board called for competitive bids and Eel River was the successful bidder, ergo a contract must be awarded to Eel River," the court remanded this case to the trial court.  The trial court, having been sharply rebuked, will now have to decide whether the granting of injunctive relief is practical (as the Court of Appeal strongly suggests it is).  In addition, the Court of Appeal seemed to leave the door open for the county to make an end run and keep the contract with Tom's Trash by making a public finding that this is in the public interest and that competitive bidding is waived--as allowed by Humboldt Code Section 561-2 (and CA Public Resources Code Section 40059).  This would not be an easy finding to make in light of the facts outlined by the Court of Appeal.  Such a finding might bring into focus constitutional limits on a public entity's discretion to declare something in the public interest in the absence of any cognizable facts.

The case is wise because it does not force a decision on the parties, but strongly sets the scene for the court and the county to do the right thing in this case, and perhaps the next time.

Time will tell.

Is P3 for Infrastructure, and Design-Build for Buildings?

Judging by Jim Parsons article in ENR, September 16/23, 2013, P3 projects are currently focused on road and transportation projects, and there is not much evidence that P3's are breaking into vertical construction:

• $1 billion, 29 mile I-95 Express Lanes in northern Virginia 
• $360 million second phase of the Presidio Parkway, San Francisco
• $840 million , 29.7 miile Nortwest Corridor covering Cobb and Cheorkee Counties, GA, 
• $1.5 billion replacement of Goethals Bridge, Elizabeth N.J. to Staten Island, N.Y. 
• $5.9 billion 21 mile I-4 Ultimate project in Orlando, Fl scheduled to begin next year

Meanwhile, the State of Nevada is undertaking its first P3 with Project NEON in Las Vegas, a  3.7 mile stretch to improve U.S 95/I-15 interchange.

Indiana DOT is looking for private investors to help build segments of I-69, a north-south shipping corridor in the southwest of the state.

As reported here, Maryland is pursuing P3 for its 16 mile Purple Line light rail link.

Jeff Levy, President & CEO of New York based Rail-Works predicts Baltimore's proposed Red Line and D.C.'s street car system will go P3.

Are we seeing infrastructure moving towards P3 and building construction moving towards design-build?

The Plaintiff Construction Defect Bar Speaks Up on ELR: Hoisted from the Comments

Brian Collins from Birmingham makes the pitch why homeowner's should have a negligence cause of action for construction defects, and that the ELR should not be used to deny damages for code violations and other defects that may not yet have caused property damage (e.g. Aas CA Sup Ct. 2000):

[P]resently we see the systematic opening and closing of [developer/builder] entities that were under-insured, under-capitalized and virtually judgment proof. [In] residential construction where performance bonds are rarely available or requested ... an enforcement of the ELR, and barring negligence to those who lack privity would leave the purchaser/homeowner with no means of recovery. Although construction defects are foreseeable and homeowners have opportunities to forego the contract, what are their options for protection? If all builders require the one year limited warranty significantly limiting claims, how may a homeowner protect for latent defects. If the builder closes shop immediately upon completion of the subdivision, where does a claimant turn?

The ability to collect a portion of their actual damages [in a negligence cause of action], after paying fees, expenses and costs through a lengthy litigation of three to four years at a minimum, is not a windfall to the homeowner and only provides a partial remedy with the tort claims. Take those away and you will effectively eliminate any meaningful options for an owner when a latent defect is discovered as a result of some subcontractor's lack of care....

A commercial setting could provide a completely different rationale but the educated parties in that context do not require the protection that should be afforded to inexperienced home purchasers. I believe a distinction must be made between actions against those in a commercial setting versus those in a residential setting. Until that is done, you will find compelling arguments on both sides of the issues that cannot be reconciled. 

The appropriate answer for this may be a statutory remedy.  Many states have enacted minimum standards for residential construction.  Provisions like California Civil Code Section 895 et. seq. (enacted in the wake of Aas) grant a cause of action to homeowners to enforce these standards directly against the developer, general contractor, subcontractors, suppliers, or architect without regard to privity of contract.  The presence of such a remedy obviates the need for a tort remedy.   

In states where no statutory remedy is available to homeowners, the burden of evaluating whether to grant a remedy in negligence continues to weigh heavily on the courts.

PuP Leadership

There is the video of Occupy Denver electing Shelby the Cocker Spaniel as leader, but this here is more dignified ....

A Pup by Any Other Name

In preparing for my role in the ABA's Fundamentals of Construction Law program in Tampa, I was reviewing the 50 slides I was expected to cover in an hour, and generally wondering how I would ever make sense of this information for an audience that is not supposed to know much about construction law. I eventually arrived at the last slide, which began with a description of P3s. In full-on wearied speaker mode, I began to silently bemoan my fate: here, on the 50th slide of a one-hour presentation, I'm supposed to say something meaningful about P3s, a topic about which many intelligent people can expound for hours. As I was trying to make sense of this, my eyes drifted to the bottom half of the slide, which contained this interesting nugget: "PuP: Contract between two or more government bodies to share risk of projects." Thus, while a PPP is a Public-Private Partnership, a PuP is (apparently) a Public-Public Partnership. The cynical voice in the back of my head, shaped by many years of representing contractors, said "Great: if one public owner isn't enough to screw up this project, we'll just keep adding more." I then wondered how it was that I had never run into a PuP before---indeed, never heard it discussed before. The idea certainly seemed to make a lot of sense. As I was thinking about it, I realized: I had run into PuPs many times before, just never by that name. I have seen many projects where the financing of construction, and the ultimate management of the constructed facility, was shared between two or more different government agencies. And the odds are, you have, too. So, with the novelty of the PuP dispelled, I started wondering: what could be said about the PuP? What wisdom or sage counsel could a community of construction lawyers bring to bear? These were my thoughts. 1. Intra-Owner Liaisons Are Critical. Whenever a project has a diverse ownership group (and this could be multiple owners or multiple stake holders within a single owner), coordination inside the ownership group becomes critical. During the course of construction, the owner needs to speak with one voice and provide clear, timely, and definitive answers to the designer and the prime contractor. In a PuP project, some member of the owners’ team (including a consultant or the designer, as appropriate) should have a formal role as the liaison for all the owners. That person needs to be tasked with running the regularly-scheduled owners’ meeting, developing an agenda for that meeting, and leaving that meeting with specific action items, whether those are answers, questions, or proposals. 2. Let the Stake Holders Run Their Stakes. In multiple owner projects, one owner is often designated as the lead owner for the purposes of project administration. This advances the cause of having the owners speak with one voice, for the lead representative provides that voice. But it frequently causes problems as the project progresses. In the construction of a facility that will be used by multiple owners, it makes little sense to have one owner provide guidance for the construction of a portion of the facility that will be used by another owner. Everyone would be better served by allowing the individual owners to take charge of their portion of the project. This increases the need for intra-owner coordination, but it should streamline overall project management, because there will be fewer mid-course corrections. The “lead owner” approach tends to increase changes during the project, as stake holders who have either not been consulted or not been heard review the plans and realize that their portion of the project will not actually fit their needs. 3. Remember the Golden Rule As most lawyers know by heart, few partnerships are true partnerships. Instead, most partnership operate under the Orwellian truism that while all animals are equal, some are more equal than others. It will be the rare PuP where all owners are financially contributing in equal shares. Similarly, it will be rare that the project is equally important to all owners. More likely, there will be one, or a few, major stake holders, and the remaining stake holders will have much smaller interests. It makes sense to identify this elephant in the room at the earliest stages of the project, and recognize and acknowledge the key owners. One of the roles of the intra-owner liaison will be to manage this unequal partnership in a way that both ensures that the key owners are satisfied and that the other owners get what they need to get out of the project. With those thoughts, I turn the conversation over to my fellow construction lawyers, to share their own experiences and recommended best practices for the well-known, but not always named, PuP project.

Paul Helligers Feasting on The Economic Loss Rule: Duty Analysis vs. Limitation on Damages, and What Will it do to Insurance?

Setting the Table 

When a member of the building team (owner, architect, engineer, construction manager, general contractor, subcontractor, consultant, manufacturer or supplier) fails to use due care in performing contractually assumed work, it is foreseeable that other project participants will suffer economic harm.  If the one who suffers the economic harm does not have a contract with the offender, is there a remedy in the law of negligence?

In the first installment of a longer article excerpted in the Fall 2013 issue of the Construction Lawyer, “Making Sense of the Economic Loss Rule in Construction Cases,” Paul Helligers traces some of the historical twists and turns that form the Gordian knot of negligence law in construction cases, with a particular focus on the economic loss rule (“ELR”).   He notes a trend “in favor of a robust ‘private ordering’ approach in construction cases.”  He cites approvingly to an article by Sidney R. Barrett Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C. L. Rev. 891 (1989) that seems to want to do away with negligence in this context: 

[P]arties involved in a construction project rely on intricate, highly sophisticated contracts to … allocate among them the risk of problems, delays, extra costs, unforeseen site conditions, and defects.  Imposition of tort duties that cut across those contractual lines disrupts and frustrates the parties’ contractual allocation of risk. 

Picking up on this, Helligers notes, the Washington Supreme Court in Berschauer/Phillips Construction Co. v. Seattle School District No. 1, 881 P.2d 986 (Wash. 1994) said: 

We hold parties to their contracts.  If tort and contract remedies were allowed to overlap, certainty and predictability in allocating risk would decrease and impede future business activity.  The construction industry in particular would suffer, for it is in this industry that we see most clearly the importance of the precise allocation of risk as secured by contract. 

Helligers concludes his first installment by extrapolating this line of thinking: 

The Wyoming Supreme Court (in Rissler & McMurry Co. v. Sheridan Area Water Supply Jt. Powers Bd, 929 P.3d 1228 (Wyo. 1996)) acknowledged that the contractor did not contract with the engineer but argued that the contractor ‘had the opportunity to allocate the risks associated with the cost of the work’ when it contracted with the project owner.  The Colorado Supreme Court (in BRW Inc. v. Dufficiy & Sons 99 P.3d 66 (Colo. 2004)) explained that the multiple parties to large construction projects typically rely on networks of two-party contracts to allocate their risks, duties and remedies.  A subcontractor ‘has the opportunity to allocate the risks of following specified design plans when it enters into a contract with a party involved in the network of contracts.  The Indiana Supreme Court (in Indianapolis-Marion Cnty. Pub. Library v. Chalierr Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010)) adopted this concept in 2010 in denying recovery to project owners suing design professionals with whom they were not in privity. 

In other words, the handwriting is on the wall, if you want to recover economic damages from fellow project participants, you had better mind the P’s and Q’s in your contracts and not rely on a privity bypassing cause of action in negligence to bail you out of a bad bargain. 

The Appetizer

I am in favor of a duty analysis in negligence that tightens the circumstances under which tort remedies will be allowed in construction cases.  See my unsolicited advice to the California Supreme Court here.    However, I am not in favor of using the economic loss rule as a categorical limitation on damages to do the job because I think a rule based application of the ELR leads to inconsistent results and arbitrary outcomes. 

Salad Course

The bar review version of a negligence cause of action as applied in a construction project is a follows:  (1) we have a duty to use reasonable care in all our endeavors so as to avoid injury to others.  (2) The care we must exercise is in accordance with our station in life:  on a construction project we must act like careful and prudent architects, contractors, construction managers, owners, trade contractors and suppliers.  (3) If we fail to follow this standard of care in a way that foreseeably and proximately will harm others, then (4) we must pay.   That is the walls of privity are broken down version of negligence we find in McPherson v. Buick Motor Company (personal injury),  Glanzer v. Shepard (overpayment for goods because of defective weight certificate) and J’Aire v. Gregory (contractor’s delay causing damage to restaurant operator).  The courts routinely apply these elements without difficulty to compensate for personal injury and property damage caused by negligent conduct. 

But it soon became clear that more than “foreseeable harm” was required in cases asserting primarily economic harm.  With the benefit of hindsight, plaintiffs, and on a clear judicial day, courts can foresee forever.  But limitless liability is not socially useful.  So courts look for ways to cut off liability.  Two primary tools for cutting off liability for foreseeable harm has been, on the one hand, failing to recognize a duty in a particular case, and, on the other hand, by disallowing certain types of damage, e.g. by application of the ELR.  

The Main Course

Helligers points to a three fold rationale for the ELR: (1) the Ultrameres problem:  indeterminate liability that is grossly disproportionate to fault (because economic losses ripple out to customers of customers of customers ad infinitum); (2) the Palsgraf problem:  the potential of over deterrence that can make economic processes inefficient if actors are exposed to liability socially harmful in its potential scope and uncertainty;” and (3) the Berschaouer/Phillips Construction problem:  whether parties in the plaintiff’s position can reasonably be expected to protect themselves through their contracts, or otherwise.  

Helligers points out that the six Biakanja v. Irving factors (CA Supreme Court 1958) have dominated the landscape for determining whether a duty exists.  The Biakanja factors are:  (1) the degree to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm. 

Helligers contends that this test is too foreseeability centric, and it certainly is in the way some courts have applied the test.  It’s worth noting that in the construction context, the first four factors are of course always present, almost by definition.  It’s only the moral blameworthiness, and the wider social need for a negligence cause of action in order to prevent future harm (as opposed to leaving the parties to the contract remedies they have all agreed on), that can swing the decision one way or the other.  That’s where the action should be.  Some courts, however, including the California Supreme Court in J’Aire v. Gregory, have completely glossed over these last two factors and basically concluded that foreseeability is sufficient.  But that is not necessarily a problem of the formula; I would say it’s a problem of application.

Dessert

Why Not Rely on the ELR instead of Duty?  In almost all construction cases, when some project members are harmed, there should not be the need to interject a tort remedy.  It’s perfectly foreseeable that some project participants might fall short in their performance, and parties are able to guard against this in their contracts.  Resolving problems entirely through a chain of contractual privity works just fine. 

The problem with relying on the ELR to do the job is that there is no good reason to distinguish between harm to property and economic harm.   When a retaining wall falls down during construction and has to be rebuilt—it’s just money.  Why should there be a distinction drawn between this cost of reconstructing a retaining wall and pure economic damages that don’t involve damage to property.  If a tort remedy, is appropriate under whatever test is adopted, there is no reason to arbitrarily exclude one type of damage.

Cognac

In California, outside the products liability context, courts have mostly granted relief, or denied relief based on the duty analysis.  Contrary to Helligers, Calfornia has not “switched” on this.  The cases continue to come out on both sides:  some following the foreseeability heavy analysis of J’Aire, and others trimming back on where they find a special relationship. As noted by Helligers, this inconsistency is typical of the country as a whole.

I’m rooting for the trend towards the private ordering of relationships among project participants.  I'm in favor of limiting the ELR to a limitation of damages in strict products liability, where it started--although this does not seem to be happening.  The trend to let project participants orchestrate their remedies through their contracts, and not recognizing tort duties for economic losses would result in the law being clearer and more rational, and predictable. 

Then there is the insurance issue.  Doing away with negligence for economic damages on construction projects, if it's done along the "is there a duty" test should properly extend to construction defect cases, even cases involving property damage, as well as purely economic cases.  If carried through, this would upset the apple cart on insurance.  Resolution of a typical large construction claims dispute relies heavily on insurance for defense and resolution of disputes.   If we take negligence out of the equation, does insurance coverage go away?

There is a quiet revolution in insurance for construction under foot already, of course, with the movement to OCIP’s, CCIP’s, legislative abolishment of many traditional forms of indemnity, and the trend to design-build and integrated project delivery.  Restricting negligence causes of action among project participants would surely accelerate these changes.