Superior Court holds construction manager at-risk responsible for design errors

Issue August 2014 August 2014 By Kenneth E. Rubinstein and Nancy McBrady

The Worcester Superior Court recently issued a potentially landmark decision clarifying the risk that construction managers assume when entering into CM-At Risk (CMR) contracts for public building projects.

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, Gilbane and the Massachusetts Division of Capital Asset Management (DCAM) entered into a CMR contract for the construction of a state psychiatric facility with a guaranteed maximum price (GMP) of $237 million. The electrical subcontractor, Coghlin Electrical Contractors, Inc., requested a significant increase in the cost of its subcontract due to alleged mismanagement by construction manager Gilbane, including scheduling issues, improper coordination with other subcontractors, and failure to manage and complete wall and ceiling framing. Although Gilbane issued a change order request to DCAM, the agency denied the request because such an "inefficiency claim" was not allowed under the CMR contract. Coghlin filed suit for cost recovery against Gilbane, which in turn sued DCAM on the grounds that as the contractual "owner" of the project, DCAM was legally responsible for damages caused by design changes and design errors that caused the additional subcontractor costs. The court dismissed Gilbane's claim against the owner, holding that as construction manager, it could not pass along the additional costs.

The court acknowledged that the suit presented a novel question: whether a construction manager with planning and oversight responsibilities as well as broad obligations under the CMR contract to indemnify and hold harmless the owner would "trump the long-standing Massachusetts common law principles to the effect that 'where one party furnishes plans and specifications for a contractor to follow in a construction job … the party furnishing such plans impliedly warrants their sufficiency for the purpose intended' [also known as the Spearin Doctrine]."

In answering this novel question, the court drew a clear distinction between design-bid-build contracts and CMR contracts, stating: "[I]n a traditional design-bid­build project delivery method, the owner is in the best position to ensure that the plans and specifications prepared by its design professionals are sufficient and adequate." While acknowledging that Massachusetts common law traditionally has protected construction contractors where an owner has supplied erroneous or ambiguous plans and specifications, the court stated that because the particular project had not followed a "traditional design-bid-build project delivery method" and instead utilized an alternative delivery method for public projects authorized pursuant to M.G.L c.149A, the common law protections did not apply.

The court explained that unlike the traditional design-bid-build methodology, the CMR process allows public entities to enter into a contract with a construction manager before the design is finished. Pursuant to M.G.L c.149A, "The purpose of entering into a contract with the CMR contractor during the design phase of the project is to involve the CMR contractor in project planning and to benefit from the CMR contractor's expertise during the design phase or the project." The court further differentiated the process of allocating cost overruns in a CMR project from the design-bid-build process. A CMR typically includes a guaranteed maximum price (GMP) that includes the cost of the work, general conditions costs, and the construction manager's fee. Absent change orders, the construction manager assumes the risk for cost overruns that exceed the GMP.

Given that a construction manager under a CMR contract assumes additional duties and enhanced financial risk, the court determined that the owner/construction manager relationship under a CMR contract is not the same as the owner/general contractor relationship found in a design-bid-build arrangement. The court noted that the CMR contract at issue had imposed upon Gilbane extensive "design review" responsibilities including the continuous review of "drawings, specifications and other design documents … for clarity, consistency, constructability, maintainability/operability…" These design responsibilities also came with "additional financial exposure" should something go wrong, since CMR contracts also allocate project cost overruns differently than traditional design-bid-build projects (e.g., a CMR contractor is bound by a guaranteed maximum price, absent approved change orders). Hence, as a result of the "material changes in the roles and responsibilities voluntarily undertaken" by construction managers in modern CMR contracts, "the protections that Massachusetts courts historically extended to construction contractors in the traditional design-bid-build contact … simply are inapplicable to [CMR] contracts."

Gilbane's argument that DCAM was contractually required to issue a change order because the changes affecting the walls and ceilings were "changes in scope" proved unavailing to the court. So was its argument that an exception to the underlying contract's broad defense and indemnity obligations applied relating to claims for design changes, errors or omissions. The court interpreted that exception as strictly applying to the designer (an agent of DCAM) and noted that because no claims had been brought against the designer, the exception claimed by Gilbane was not relevant.

The Coghlin decision presents real concerns to those engaged in CMR projects. Construction managers typically conduct constructability reviews, but do not generally check all of the architect's or engineer's designs and calculations in performing their review. Nonetheless, this decision portends that the construction manager essentially becomes the guarantor of design specifications and that change orders are no longer a legitimate means of seeking recourse for design-related problems that may be encountered on a project. Unless overturned on a likely appeal, there is a serious risk that the Coghlin decision will disincentivize contractors from agreeing to CMR projects. Further, CMR contract terms and conditions will have to be carefully scrutinized and negotiated in order to avoid similar outcomes. In addition, contract price proposals will have to be adjusted to accommodate the enhanced risk associated with CMR contracts pursuant to this decision.