Mainstreaming the P3 Process--Is it Just for Mega Firms?

How can you tell when a delivery system is coming into its own?  Here's one way to gauge the progress of P3 as a delivery system:  Law firms are marketing three hour courses on bid protests.

Here is Frank Rapoport touting his course (Peckar & Abramson), which looks very polished:

P&A is pleased to announce its second course offering for the P3 industry – Bid Protest Clinic for P3 and Design-Build Teams. 

This course follows P&A’s first course – Making the Transition to P3 (A roadmap for construction contractors on how to forge public private partnerships (P3s) with government agencies and negotiate with private equity partners.)

Why Take This Course?

There has been a visible increase in the number of bid protests on P3 projects, since the publication of the attached 2012 article. Projects being protested have included the Goethals Bridge, Cincinnati Innerbelt Bridge, Maryland I-95 Rest Stops, and I-15 in Utah (DB). 

If a team is not shortlisted or is not selected for an award under a solicitation, the  unsuccessful bidder should always request a debriefing from the owner. Being prepared to ask and demand answers to the right questions is critical to achieving a  meaningful debriefing. Our Bid Protest Clinic covers the information and questions to submit in advance of the debriefing, to create a paper trail, as well as the type of questions that are and are not appropriate

In the meantime, mid-size contractors are asking questions.  Aileen Cho at ENR reports from the annual meeting of Construction Financial Management Association recently held in San Diego--will the adoption of P3 for medium size projects leave medium and smaller size contractors in the cold?  

Here is one man's opinion, James Merrill, managing director with Star America Capital Advisors.

[F]oreign firms typically eye alternative delivery projects of $500 million+ in the U.S. "They want the big, flashy projects," he said. But there are examples in Canada of smaller—$30-million design-build projects, for example—that, "if set up right, the [midsize] contractors are not cut off," added Jeff Parkhurst, principal with Epic, an insurance and bonding broker.

The potential of a big design-build project causing more specialization on smaller projects and cutting out the midsize contractors is a concern, Merrill said. When asked what resources those contractors had, he said, "You can call me."

Who is Shanghai Construction Group?

Surely you've seen the side-by-side photos of Shanghai in 1987 and Shanghai in 2013. It's a remarkable portrait of ambition, energy, and progress of a people.  It brings to mind the building of Hoover Dam, or Baron von Haussmann's reconstruction of Paris.   On August 3, 2013, the final beam was placed to top out China's tallest, and the world's second tallest building, the Shanghai Tower. It's stylish, it's green, it's sophisticated. It has 121 occupied floors and more than 4 million square feet of space.  

American companies are well represented in this construction.  Gensler is the design architect, Thornton Tomasetti are the structural engineers, and Cosentini is providing the MEP engineering. Autodesk Consulting provided the BIM strategy, training and implementation of Navisworks, Revit, and a host of other programs.   Elevators are provided by Mitsubishi.  

There is the local design institute, Architectural Design and Research Institute, at Tongji University, presumably trying as hard as they can to appropriate the knowledge.  The general contractor is Shanghai Construction Group and the MEP contractor is Shanghai Installation Engineering, a subsidiary of Shanghai Construction Group, and the local engineering consultants also appear to be a subsidiary of Shanghai Construction Group.  The Owner is Shanghai Tower Construction & Development Co., Ltd, .... also a subsidiary of Shanghai Construction Group.

Who is Shanghai Construction Group?  They are big and they seem to have a huge piece of construction, not only in Shanghai but throughout China.  And they are competing for international business.  In 2011 they were listed in the No. 54 spot of top international contractors by ENR Magazine.

Below is a promotional video for Shanghai Construction Group.  They were founded in 1953, just four years after the foundation of the People's Republic of China.  They started out as a state organ, and so they seem to be still.  The company website lists a board of directors of two:  chairman Jiang Zhi-Quan and President Xu Zheng.  Jiang is Secretary in the Committee of Communist Party of China.  Xu is a Deputy of the 11th National People's Congress.

Here is a Forbes profile of Chairman Jiang:

Jiang Zhiquan, 60, is Secretary of the Communist Party Committee and Chairman of Shanghai Construction (Group) General Company. In June 2005, Mr. Jiang was elected Independent Director of the Company. Mr. Jiang started work in December 1968, and has held various positions including a cadre and Deputy Director of Shanghai Construction and Industry Bureau, Manager of the Fourth Construction Company of Shanghai, Deputy Secretary of the Communist Party Committee of the Shanghai Construction Engineering Administration Bureau (being in charge of the overall work of the unit), Deputy Secretary of the Communist Party Committee (being in charge of the overall work of the unit), Vice Chairman and General Manager of the Shanghai Construction Group. In March 2001, he assumed the current positions as Secretary of the Communist Party Committee and Chairman of Shanghai Construction (Group) General Company. Mr. Jiang is experienced in operational decision making and large-scale enterprise management. Mr. Jiang graduated from the Shanghai-Hong Kong Management School jointly run by the University of Hong Kong and Fudan University in July 2000 and obtained an MBA. He is a senior economist by professional title.

The video below is remarkable, and jarring, by Western standards.  As you listen, it dawns on you, this is not a private company talking, this is the government of China talking.   "All these high rises," with a wave to the Shanghai skyline, "were built by the Shanghai Construction Group."  "Many beautiful sceneries, one scene after another, were painted with a giant pen used by the Shanghai Construction Group."  

As the music on the video changes from British Newscast, to Chinese symphonic, to Chinese pastoral, to Chinese patriotic, the commentary waxes eloquent:  "the attractive tune of fixed music is struck by the Shanghai Construction Group.  All the architecture, which will be passed down from generation to generation, are done with wisdom and intelligence by the hand of the Shanghai Construction Group. They are really art treasures, epic and monumental."  

How do they see the legacy this will create?  "All these classical buildings are top notch work contributed by Shanghai Construction Group to the people of Shanghai, and have won the appreciation of Shanghai people."    "Forging steadily ahead in the course of business expansion ... Shanghai Construction Group now boasts proud competition power in the construction market.  The annual turn-over has increased a yearly increase of over 20 percent."  

It's the Chinese government competing as a private enterprise. 

"Aiming at the world wide trend of general contracting, and facing different demands of clients and domestic and overseas markets, Shanghai Construction Group has adopted various engineering contracting ways, such as the turnkey method of the Chin Mao Tower, and others like BOT, BT, general contracting, construction management, etc. It is a manifestation that the management and service of Shanghai Construction Group have ascended to a higher level....  Shanghai Construction Group possesses a State Level Technical Research Center. ..... Shanghai Construction Group has been growing steadily with the development of our country, and in the course of world wide competition. ....With fruitful development over the past fifty years, at a time of peace and prosperity, armed with advanced science and technology of our time, always pursuing the best Shanghai Construction Group is looking into the bright future and marching towards its goal of becoming a large construction group in the world of international competition. 

Armed with science and technology, looking into its bright future, and its goal of dominating world competition, Shanghai Construction Group.

 

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Making “Special Relationships” less special: Advice to the California Supreme Court for deciding Beacon Residential Community Association v. Skidmore, Owing & Merrill LLP.

In California, the courts are as muddled as anyone about the rationale and extent of the Economic Loss Rule.   In Beacon Residential Community Association v. Skidmore, Owing & Merrill LLP, currently pending in the California Supreme Court, there is an opportunity to fix this—let us hope they will. 

Historically, California courts followed the view that the negligent breach of a contractual duty resulting in economic harm would not give rise to a cause of action in negligence.  Buckley v. Grey (1895) 110 C 339.  Fifty-five years ago, however, the California Supreme Court departed from the historical rule and said that economic damages should be allowed in negligence actions if the parties are in a “special relationship.”   Biakanja v. Irving (1958) 49 Cal. 2d 647.  The court established a six factor balancing test to evaluate whether a relationship is sufficiently “special.”  The six 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. 

In the 60’s, a time of peace, love, and understanding, the courts, in keeping with the times, were liberal in recognizing special relationships.  Thus in Stewart v. Cox (1961) 55 Cal. 2d 857, the Supreme Court found a “special relationship” between a homeowner and a concrete subcontractor who negligently installed a swimming pool.  That same year, the First District Court of Appeals, in M. Miller Co. v. Dames & Moore (1961) 198 CA2d 305, allowed recovery of economic damages in negligence.  The court held that an underground contractor who encountered unstable soil could sue the soils engineer hired by the owner in negligence for the increased cost of performance.  The court cited Biakanja and said: “it was held that the transaction was intended to affect the plaintiff and injury to the plaintiff was foreseeable.”  Also in 1961, in Lucas v. Hamm (1961) 56 Cal.2d 583, the California Supreme Court held that the Biakanja rule would apply to permit a cause of action in negligence by a beneficiary under a will who received less than intended because of attorney error.  In Conner v. Great Western Savings & Loan Association (1968) 69 Cal.2d 850 the Supreme Court allowed a negligence cause of action for economic damages resulting from improperly compacted foundations.   Applying the Biakanja factors, the court found the requisite “Special Relationship” existed to allow homeowners to state a cause of action against the construction lender for the development project.  In Kent v. Bartlett (1975) 49 CA3d 724, the court permitted a negligence action for economic damages to proceed against a land surveyor who incorrectly surveyed the division of a plot of land into two lots.  Finally, in J’Aire v. Gregory (1979) 24 Cal.3d 799 the California Supreme Court allowed a restaurant owner to recover economic damages in negligence from a contractor (lost business from delayed opening of restaurant).  The theory was that the contractor negligently delayed completion of construction, damage was foreseeable, and voila! 

J’Aire was the high water mark of the movement to allow recovery of foreseeable economic damages in negligence by the California Supreme Court.  Since then, the court has retrenched considerably.  In Erlich v. Menezes (1999) 21 Cal.4^th 543 the court made clear that, without more, negligent performance of a construction contract does not justify an award of tort damages. The following year, in Aas v. Superior Court (2000) 24 Cal.4^th 627 the court applied the Biakanja factors and held that economic damages in negligence are not available for the negligent breach of a construction contract where the damage is limited to the defective work itself and the defective construction has not caused damage to other property. 

Some California Courts of Appeal decisions have picked up on the sea-change.   In The Ratcliff Architects v. Vanir Construction (2001) 88 Cal.App.4^th 595, an architect alleged that a construction manager mismanaged a school renovation project, causing the architect to incur additional uncompensated costs.  The court found that the construction manager did not have the requisite “special relationship” to owe a duty of care to the architect.  The construction manager’s service was not intended to benefit the architect; moreover, the “moral blame” and connection to the alleged injury were too remote to justify imposition of a tort duty.  Similarly, in Weseloh Family Ltd. Partnership v. K.L. Wessel Construction Co. (2004) 125 CA4th 152, the court held that an engineer, consultant to a subcontractor who agreed to design-build a retaining wall, did not owe a duty of care to the general contractor or the owner on the project.  In Lake Almanor Assoc. L.P v. Huffman-Broadway Group, Inc. (Cal. App. Ct. 2009) 178 Cal. App. 4th 1194, 1205 the court found no tort duty existed for an environmental consultant to timely produce an environmental impact report.

Other California Court of Appeals decisions have not picked up on the sea-change wrought by Menzes and Aas.  A trio of cases decided in 2004 demonstrates that some appellate courts have a continued commitment to allow economic damages for negligence in construction cases.  First, in Mesa Vista South Townhome Assn. v. California Portland Cement Co. (May, 2004) 118 Cal. App. 4th 308 the court upheld a negligence award in favor of a homeowner against a concrete manufacturer who supplied the wrong concrete mix, resulting in “sub-microscopic” cracking of concrete foundations.  A negligence claim was allowed despite the fact that damage was limited to the defective part, i.e. the concrete foundation.  The Supreme Court declined to review this case but decertified the decision for publication.  Second, in Superior Gunite v. Ralph Mitzel, Inc. (2004) 117 Cal.App.4^th 301 the court upheld a negligence award to a lower tier subcontractor for lost profit resulting from productivity losses caused by a general contractor’s failure to properly manage the project.  The Supreme Court declined to review the case and allowed it to be published.  Third, in Shekter v. Seneca Structural Design (2004) 121 Cal.App.4^th 1055, the court allowed a plaintiff owner to proceed with a cause of action in negligence against a contractor’s design consultants for allegedly failing to follow the standard of care in designing repairs to an elevated deck structure.  “Progressive cracking” of the deck was alleged.  The court held that the owner could recover damages in tort if he could prove that a defective design resulted in appreciable, nonspeculative, present physical damage to the repaired structure.  The Supreme Court denied review and decertified the opinion for publication. 

After depublication of Shekter, the First Division of the Court of Appeals reached the same result in Beacon Residential Community Association v. Skidmore, Owing & Merrill LLP et al. (2012) 211 Cal. App. 4th 1301 (“we find nothing in the Biakanja factors that would preclude imposition of liability upon the architects to purchasers of residential construction for alleged negligence in the rendition of professional services.”)

The problem is that, in Aas, the California Supreme Court failed to tackle the problem head on.  The court changed course and clearly implied that J’Aire went too far.  However, the court failed to overrule J’Aire and, instead, finessed its decision with an allusion to the economic loss rule.  The court said:

“The difference between price paid and value received, and deviations from standards of quality that have not resulted in property damage or personal injury, are primarily the domain of contract and warranty law or the law of fraud, rather than of negligence.  In actions for negligence, a manufacturer's liability is limited to damages for physical injuries; no recovery is allowed for economic loss alone. (Seely v. White Motor Co. (1965) 63 Cal. 2d 9, 18.) This general principle, the so-called economic loss rule, is the primary obstacle to plaintiffs' claim.” 

And, of course, this is just so wrong….

Yes, it’s true, “Economic loss” has been defined as “damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits -- without any claim of personal injury or damages to other property." See Note, Economic Loss in Products Liability Jurisprudence (1966) 66 Colum.L.Rev. 917, 918.  It’s also true that in California the rule that such damages cannot be recovered in products liability cases derives from a dictum in the case of Seely v. White Motor Company (1965).  In Seely, the Supreme Court affirmed judgment in favor of the purchaser of a defective truck against the manufacturer for lost profits and return of the purchase price.  Recovery was based on an express warranty, i.e. contract.  The court, however, embarked on a general discussion regarding the distinction between warranty law and tort recovery in order to explain its view why recovery would not have been appropriate under a strict liability theory.  The court noted that whereas a manufacturer can be held liable for physical injuries caused by defects in its products, by requiring its goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm, it cannot be held for the level of performance of its products in the consumer’s business (e.g. lost profits) unless it agrees that the product was designed to meet the consumer’s demands. 

And, yes it’s true, that the Seely court also said that “Even in actions for negligence, a manufacturer’s liability is limited to damages for physical injuries and there is no recovery for economic loss alone.”  But this dictum in Seely that economic damages are not available in California on a negligence cause of action is, of course, not correct.  The Supreme Court allowed the recovery of economic loss in negligence actions in both Biakanja and Stewart v. Cox.  Presumably the court was well aware of those decisions when it decided Seely.  Seely was only thinking of product liability and, in its dicta, it thoughtlessly failed to distinguish between negligence and strict liability.  [There's a reason we shouldn't pay attention to dicta!]

The economic loss rule developed as a categorical limitation of damages in strict liability in the wake of McPherson v. Buick Motor Company.  This makes sense.  Strict liability is imposed on defendants without regard to fault.  It is one thing to hold a manufacturer of a product strictly liable for property damage or personal injury caused by their mass-produced goods; it is another thing entirely to hold them strictly liable for a purchaser’s frustrated expectations of performance of the product.  If a defective tennis racquet causes Serena Williams to lose match point, courts do not, and should not hold the manufacturer liable in strict liability for the lost prize money. 

With negligence, on the other hand, there is not, and should not be a categorical limitation on economic damages.  The question is one of duty.   Damages for breach of a contractual duty cannot be recovered in negligence unless there are some overriding social factors that make the imposition of a legal duty proper.  The Supreme Court has outlined what those factors are in Biakanja.  These are well settled.  It is perfectly reasonable to look at the fact that the damage is nothing more than a frustration of an expectation interest arising from contract, as the Supreme Court did in Aas, to determine that there has not been substantial harm of the type that should be recognized in a negligence cause of action.  But that is not a categorical rule on damages.  That is simply an application of the recognized factors for determining whether there should be a duty. 

The “economic loss” rule should be maintained as a categorical rule for strict liability actions, the Biakanja factors should govern in negligence actions.  

A failure by the Supreme Court to seize the opportunity to formally overrule J’Aire v. Gregory in Beacon Residential Community Association will lead to more bad law.  Take for example, Black & Veatch Corporation v. Modesto Irrigation District (2011) 827 F. Supp. 2d 1130.  There, the poor Federal District Court, confronted by the apparent conflict between J’Aire and Aas, tried to reconcile the two by articulating a rule that economic damage is recoverable for negligent interference with prospective economic advantage, but not available under a defective construction claim.  This is a highly artificial distinction, and thus bad law, because any claim for negligent breach of a construction contract can be pled just as well as a negligent interference with prospective economic advantage.  It is to devolve to sophistry … and, with all due respect to Thrasymachus, where I come from that is a bad thing. 

Let’s hope the Supreme Court gets it right and fixes this. 

The Battle of Giants: Nine Months to Construct the World's Tallest Tower?

Burj Khalifa, Dubai

The Burj Khalifa in Dubai, currently the worlds largest skyscraper, was built in five years (September 2004 to January 2010).



In Changsha China, the capital of Hunan Province in South Central China (population 7 million), Developer Broad Group has plans to construct  a 208-storey 9 million square foot tower, slated to be 10 meters taller than the Burj Khalifa. Groundbreaking was on July 20, 2013.

South China Morning Post:

Named “Sky City”, the mega building is designed to house various public facilities so the “building can serve as a city”, the developer said. It would house schools, an elderly care center, hospital, offices in lower levels, while apartments and hotels would make up the upper levels.

The new "tallest" looks rather boxy and utilitarian in its construction. But they say it will be completed by April 2014!!!  A 208 story tower from goundbreaking to occupancy in ten months?

Really?

From Wikipedia:

Broad Sustainable Building, which specializes in making buildings that are sustainable, cost less, use environment friendly materials and can be built in a short amount of time, using techniques like prefabrication, had intended to build a 666 m (2,185 ft) tall skyscraper, but the local government wanted the world's tallest building, hence the current plans. The company has constructed 20 buildings in China using the same method and has several franchise partners globally. The Broad Group have previously concentrated on manufacturing large air-conditioners, being among the world leaders in solar air-conditioning, before they shifted to constructing environment-friendly buildings. All employees of the group must follow a manual issued by the company chairman, Zhang Yue, which contains tips on energy-conservation. He also was awarded the Champions of the Earth award by the United Nations in 2011 for his contributions towards the environment. 

O.K. the race is on.  They've put themselves out there.  We'll keep an eye on progress.

"Sky City" rendering,
Changsha China

The Spearin Doctrine (part 1 of 3)

Brooklyn Navy Yard is the home to one of our revered doctrines in construction law, the Spearin Doctrine. In this post we acknowledge the ongoing development of the Brooklyn Navy Yard, and review the facts and holding of this seminal case.  In two follow up posts we will examine some of the myth and reality of the Spearin doctrine.

The Brooklyn Navy Yard

On June 14, 2013, the New York Times ran a photo feature on what's happening with the Navy Yard.  

The Brooklyn Navy Yard dates to 1801, when an entrepreneurial shipbuilder named John Jackson sold his land on Wallabout Bay, in the East River, to the federal government. At the yard’s peak in World War II, 70,000 men and women worked there. But it never recovered from a severe postwar decline, and the government closed it in 1966. The city turned the site into an industrial park, and today it seems to be a model of eco-friendly adaptive reuse. Only Building 92, which houses an interactive museum and job center, is regularly open to the public, but tours by bus and bicycle allow visitors to see the campus. To get there, take a bus to Flushing Avenue, the F train to York Street or ride a bike — if you don’t have one, there are Citi Bike stations nearby.

Here's what it looked liked during Wold War II:

The Case  (United States v. Spearin, 248 U.S. 132 (U.S. 1918)

Justice Brandeis

Spearin contracted to build for $ 757,800 a dry-dock at the Brooklyn Navy Yard in accordance with plans and specifications which had been prepared by the Government. The site selected by it was intersected by a 6-foot brick sewer; and it was necessary to divert and relocate a section thereof before the work of constructing the drydock could begin. The plans and specifications provided that the contractor should do the work and prescribed the dimensions, material, and location of the section to be  [*134]  substituted. All the prescribed requirements were fully complied with by Spearin; and the substituted section was accepted by the Government as satisfactory. It was located about 37 to 50 feet from the proposed excavation for the dry-dock; but a large part of the new section was within the area set aside as space within which the contractor's operations were to be carried on. Both before and after the diversion of the 6-foot sewer, it connected, within the Navy Yard but outside the space reserved for work on the dry-dock, with a 7-foot sewer which emptied into Wallabout Basin.

About a year after this relocation of the 6-foot sewer there occurred a sudden and heavy downpour of rain coincident with a high tide. This forced the water up the sewer for a considerable distance to a depth of 2 feet or more. Internal pressure broke the 6-foot sewer as so relocated, at several places; and the excavation of the dry-dock was flooded. Upon investigation, it was discovered that there was a dam from 5 to 5 1/2 feet high in the 7-foot sewer; and that dam, by diverting to the 6-foot sewer the greater part of the water, had caused the internal pressure which broke it. Both sewers were a part of the city sewerage system; but the dam was not shown either on the city's plan, nor on the Government's plans and blue-prints, which were submitted to Spearin. On them the 7-foot sewer appeared as unobstructed. The Government officials concerned with the letting of the contract and construction of the dry-dock did not know of the existence of the dam. The site selected for the dry-dock was low ground; and during some years prior to making the contract sued on, the sewers had, from time to time, overflowed to the knowledge of these Government officials and others. But the fact had not been communicated to Spearin by anyone. He had, before entering into the contract, made a superficial examination of the premises and sought from the civil engineer's office at the Navy  [*135]  Yard information concerning the conditions and probable cost of the work; but he had made no special examination of the sewers nor special enquiry into the possibility of the work being flooded thereby; and had no information on the subject.

Promptly after the breaking of the sewer Spearin notified the Government that he considered the sewers under existing plans a menace to the work and that he would not resume operations unless the Government either made good or assumed responsibility for the damage that had already occurred and either made such changes in the sewer system as would remove the danger or assumed  [**61]  responsibility for the damage which might thereafter be occasioned by the insufficient capacity and the location and design of the existing sewers. The estimated cost of restoring the sewer was $ 3,875. But it was unsafe to both Spearin and the Government's property to proceed with the work with the 6-foot sewer in its then condition. The Government insisted that the responsibility for remedying existing conditions rested  [***169]  with the contractor. After fifteen months spent in investigation and fruitless correspondence, the Secretary of the Navy annulled the contract and took possession of the plant and materials on the site. Later the dry-dock, under radically changed and enlarged plans, was completed by other contractors, the Government having first discontinued the use of the 6-foot intersecting sewer and then reconstructed it by modifying size, shape and material so as to remove all danger of its breaking from internal pressure. Up to that time $ 210,939.18 had been expended by Spearin on the work; and he had received from the Government on account thereof $ 129,758.32. The court found that if he had been allowed to complete the contract he would have earned a profit of $ 60,000, and its judgment included that sum.

He goes on to discuss the background legal principles.

The general rules of law applicable to these facts are well  [*136]  settled. HN1 Where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered. Day v. United States, 245 U.S. 159; Phoenix Bridge Co. v. United States, 211 U.S. 188. Thus one who undertakes to erect a structure upon a particular site, assumes ordinarily the risk of subsidence of the soil. Simpson v. United States, 172 U.S. 372; Dermott v. Jones, 2 Wall. 1. But if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications. MacKnight Flintic Stone Co. v. The Mayor, 160 N.Y. 72; Filbert v. Philadelphia, 181 Pa. St. 530; Bentley v. State, 73 Wisconsin, 416. See Sundstrom v. New York, 213 N.Y. 68. This responsibility of the owner is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work, as is shown by Christie v. United States, 237 U.S. 234; Hollerbach v. United States, 233 U.S. 165, and United States v. Utah &c. Stage Co., 199 U.S. 414, 424, where it was held that the contractor should be relieved, if he was misled by erroneous statements in the specifications.

And he applies these to the case before him.

In the case at bar, the sewer, as well as the other structures, was to be built in accordance with the plans and specifications furnished by the Government. The construction of the sewer constituted as much an integral part of the contract as did the construction of any part of the dry-dock proper. It was as necessary as any other work in the preparation for the foundation. It involved no separate contract and no separate consideration. The contention of the Government that the present case is to be distinguished from the Bentley Case, supra, and other similar cases, on the ground that the contract with reference to the sewer is purely collateral, is clearly without  [*137]  merit. The risk of the existing system proving adequate might have rested upon Spearin, if the contract for the dry-dock had not contained the provision for relocation of the 6-foot sewer. But the insertion of the articles prescribing the character, dimensions and location of the sewer imported a warranty that, if the specifications were complied with, the sewer would be adequate. This implied warranty is not overcome by the general clauses requiring the contractor, to examine the site, 1 to check up the plans, 2 and to assume responsibility for the work until completion and acceptance. 3 The obligation to examine the site did not impose upon him the duty of making a diligent enquiry into the history of the locality with a view to determining, at his peril, whether the sewer specifically prescribed by the Government  [***170]  would prove adequate. The duty to check plans did not impose the obligation to pass upon their adequacy to accomplish the purpose in view. And the provision concerning contractor's responsibility cannot be construed as abridging rights arising under specific provisions of the contract.

…The breach of warranty, followed by the Government's repudiation of all responsibility for the past and for making working conditions safe in the future, justified Spearin in refusing to resume the work. He was not obliged to restore the sewer and to proceed, at his peril, with the construction of the dry-dock. When the Government refused to assume the responsibility, he might have terminated the contract himself, Anvil Mining Co. v. Humble, 153 U.S. 540, 551-552; but he did not. When the Government annulled the contract without justification, it became liable for all damages resulting from its breach. 

The core holding here is clear enough.  When an owner prescribes the character, dimensions, and location of the work, and directs the contractor to follow those instructions, the owner, not the contractor, assumes the risk that the instructions are adequate and will achieve the desired result.  

Here are the obvious corollaries: 

1. If a house of cards built according to the owner's prescriptive instructions collapses, the contractor is not in breach and additional performance is excused unless the contractor receives a change order
2. If the plans have to be changed, the contractor is entitled to a change order for additional costs
3. If the owner refuses to issue a change order, the contractor is justified not to perform

Happy 4th of July to All!

Marrying the MacLeamy Curve with "Just in Time Delivery"

Robert Springer's presentation on IPD, developer risk, and the cost of money has prompted the following email from Sandy Zirulnik.  Sandy is past president of On Line Consulting and Guidepost Solutions.

Bob Springer's presentation outlines some hurdles to expending considerable design effort early in the development process of a project.  Sandy suggests that we should look at "just in time delivery" as another layer on Bob's presentation.  

Here is Sandy Zirulnik:  

Let me propose a particular terminology that might be helpful to consider.

 In terms of industrial logistics, we are familiar with "just-in-time" delivery of various elements of the supply chain.  "Just-in-time" delivery to wholesaler or retailer means less capital outlay and less inventory on shelf, reducing costs of doing business.  "Just-in-time" also is applied in factory assembly work, with "just-in-time" delivery of parts to the assembly line, also reducing necessity to have capital tied up in material sitting on shelves; also the cost of shelves.  This methodology also reduces risk by not requiring a big cost commitment to parts that might not be used due to lack of demand for the predicted level (or type) of product.  Reduction of risk is a big element of the Springer presentation and rightly so.

If we apply "just-in-time" to the development process, we can look at how that works with design, financing, and construction, and this will overlay well with the charts in the presentation.

 Just-in-time financing means we would like to defer spending money, particularly if we think the costs of funds are stable or may decline.  Just-in-time design means we would like to defer design decisions until the last practical moment.  Why?  This allows us to continue to adjust the building to meet our possibly changing ideas of the ideal building configuration, methods, materials, etc. which may be getting more efficient, sustainable, less costly, etc.  We do not save money by doing design early if we are not confident that our design decisions are perfect.  Otherwise we increase risk by locking-in the design before we know as much as we can know about the building we want.  (An aside:  a good design process acknowledges that building use may (will) change over the course of the design and occupancy of the facility, and  incorporates design elements which provide flexibility in terms of use.  I have not seen this requirement well-incorporated into the IPD projects I have worked on.  Rather, I have seen the push to wring out any costs associated with construction which results in greatly reduced future flexibility) 

There is a special requirement to utilize just-in-time design for technology elements of a building, which due to product evolution will not be the same on design day one as they will on construction completion day, no matter how fast the design and construction process.

Just-in-time concept continues into the construction phase.  Let's call that more broadly the procurement phase, which involves construction material and labor, as well as furnishings, commissioning, etc.  So there is an art here to decide if it is possible or desirable to devise means for the developer or owner to lock-in costs of procurement early.  A big factor is the quality of the crystal ball used to anticipate the cost of capital for construction.  Going to go up or going to go down?  Have it in hand or need to borrow at some future time?  This risk factors cannot be eliminated or even fully quantified.  Nothing new there, but as correctly noted in the presentation, a front-loaded IPD project does start spending more money earlier than the conventional process, so the risks must be managed differently.

I think it is possible to apply just-in-time design to IPD process.  We should not set as a goal to have the fully developed design documents before a shovel goes into the ground.  Compression of the design and construction process will reduce the duration of exposure to financial uncertainty and risk.  This is an advantage not fully considered in the Springer presentation.

 Finally, what does "just-in-time" mean in terms of other risks such as required entitlements or shifting markets?  Good "just-in-time" means those risks (identification, quantification, mitigation strategy) are given early consideration, and this generates factors to be put on the project timeline.  Cathedral Hill Hospital  (two years of design effort prior to entitlement, which ultimately required large changes)  is a great example of failure to properly schedule certain entitlement risks.  As a result the design activities got out of sequence to these risks.  The word "time" in "just-in-time" means the last responsible moment when the activity can occur, considering not just the designer or builder's sequence of work, but also all other material activities, including entitlement approval, capital commitment, business plan, etc.