By: Joseph M. Leone
Construction Management at Risk (“CM at Risk”) is becoming more and more popular as a delivery system, especially on public projects. Many states, including Indiana, have recently enacted statutes which allow public bodies to deliver construction projects using CM at Risk. The most highly touted benefit of CM at Risk is early involvement of the construction manager to provide preconstruction services such as constructability reviews. However, construction managers may, unwittingly, be exposing themselves to design liability by providing preconstruction services.
In the recent case of Coghlin Electrical Contractors v. Gilbane Building Company, 36 N.E.3d 505 (Mass. 2015), the Supreme Judicial Court of Massachusetts addressed the issue of whether a CM at Risk assumed design liability to a subcontractor for defects in the plans and specifications. The State of Massachusetts, through its Division of Capital Asset Management and Maintenance, undertook the design and construction of a new psychiatric facility. The State contracted with a designer to prepare the plans and specifications and later, after the design was partially complete, contracted with Gilbane Building Company to act as the CM at Risk. The CM at Risk contract contemplated that Gilbane would provide typical CM preconstruction services including making recommendations on design modifications, alternatives, and value engineering followed by construction of the project under a cost plus with a guaranteed maximum price compensation format.
After completion of the design, Gilbane subcontracted the electrical work to Coghlin. During construction, Coghlin complained that design errors and omissions, among other problems, caused Coghlin’s labor hours to increase by nearly 50% and submitted a request for equitable adjustment. The primary culprit, apparently, was the all too familiar problem of lack of sufficient space above the ceiling in which to install the MEP infrastructure. After the parties failed to resolve the dispute, Coghlin filed suit against Gilbane who, in turn, filed a Third Party Complaint against the State to the extent of Coghlin’s damages.
This case involves one of the most basic protections that contractors rely upon when performing construction work, the implied warranty of the adequacy of the plans and specifications, also known as the Spearin Doctrine. The Spearin Doctrine states that where the owner furnishes plans and specifications for a contractor to use during construction, the owner impliedly warrants that the plans and specifications will be adequate for that purpose. So that, if the plans and specifications contain a defect, which causes the contractor increased cost in constructing the project, the contractor will be entitled to an equitable adjustment for those costs. Without the implied warranty of the adequacy of the plans and specifications, the contractor will be obligated to remediate the defects at its own cost. Obviously, the stakes are high in these cases.
In Coghlin, the lower court held that an owner does not provide an implied warranty of the adequacy of the plans and specifications under the CM at Risk delivery method. The court reasoned that the role of the CM at Risk was so different than the role of a traditional general contractor, because of the CM at Risk’s involvement in the design process, that the Spearin warranty was not applicable. As a result, Gilbane would have been obligated to pay the subcontractor’s additional costs without recourse against the State. Gilbane appealed the lower court’s decision.
In its opinion, the Massachusetts Supreme Court recognized that the CM at Risk delivery method was a newer approach and that the issue of whether the implied warranty of the adequacy of the plans and specifications applied to a CM at Risk contract had never been addressed. The Court acknowledged that a CM at Risk was inherently different than a traditional general contractor. In performing its analysis, the Court relied heavily on the language in the enabling statute which allowed the State to use the CM at Risk delivery system. Mass. G.L. c. 149A. It noted that the statute allowed the State to contract with a CM at Risk to provide “a range of preconstruction and construction management services which may include . . . consultation regarding the design of the building project . . .” Id, §2. The Court noted that the fact that the CM at Risk may influence the project’s plan and specifications created an essential difference with a traditional general contractor. The Court also found it instructive that, under the CM at Risk delivery method, the CM at Risk agrees to a GMP which includes a contingency and, therefore, can consider the risk of potential additional costs during construction.
However, the Court rejected the reasoning of the lower court that a CM at Risk and a traditional general contractor were so different that the Spearin warranty did not apply. The Court determined that, while a CM at Risk may have some input into the design process, the designer ultimately controls the design. The fact that the contract did not require the State to accept Gilbane’s suggestions did not shift the responsibility for design from the State to Gilbane. The Court stated that the “responsibility for a defect rests on the party to the construction contract who essentially controls and represents that it possesses skill in that phase of the overall construction process that substantially caused the defect.” Cohlin v. Gilbane, supra at 513, quoting J. Sweet & M.M. Schneier, Legal Aspects of Architecture, Engineering and the Construction Process (9th Ed. 2013) at § 16.02A. The Court also found it important that the contract specifically stated that the CM at Risk was not acting in the capacity of a design professional when providing its services.
A caveat is in order, however. The Court recognized that the difference in responsibilities between a CM at Risk and a traditional general contractor required a different analysis as to the application and extent of the Spearin warranty. The Court stated that the implied warranty applied “only where [the CM at Risk] has acted in good faith reliance on the design and acted reasonably in light of [its] own design responsibilities.” Id at 514. The Court expanded this view by recognizing that the level of participation in the design phase and the extent to which the contract delegates design responsibility to the CM at Risk may affect whether the CM at Risk’s reliance on the plans and specifications was reasonable. “The greater the [CM at Risk’s] design responsibilities in the contract, the greater the [CM at Risk’s] burden will be to show . . . that its reliance on the defective design was both reasonable and in good faith.” Id. It is the CM at Risk’s burden of proof to show that it relied on the plans and specifications reasonably and in good faith. “The amount of recoverable damages may be limited to that which is caused by the CMAR’s reasonable and good faith reliance on design defects that constitute a breach of the implied warranty.” Id.
The Court’s decision begs the question as to what is reasonable and good faith reliance. This is a question of fact to be decided by a judge or jury on a case by case basis. One major concern for CM at Risk contractors going forward should be the extent to which the CM at Risk has design responsibility for a specific recommendation made during the design development process. That issue did not present itself in this case, where the design defect was a product of the overall design which did not involve a suggestion by the CM at Risk. However, the language in the Court’s opinion leads one to believe that the CM at Risk may not be able to rely on the plans and specifications where the defect is related to a suggestion made by the CM at Risk. Once again, that issue will be determined by a judge or jury on a case by case basis, but, it is more important than ever that the CM at Risk’s specific responsibilities be identified in the contract and that each parties’ risks are delineated up front before an issue like this arises.