14C — May 20 - June 16, 2022 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
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O wners , D evelopers & M anagers
By Paul Norris, Stark & Stark, PC How to manage a construction project
he proper management of a construction project is a daunting task for ei- ther a property owner or a man- agement company which must be carefully monitored. There are several key areas which an owner or property manager should consider when manag- ing a construction project that involves either their personal property, or a property they are managing for another person or entity. The idea of this article is to provide a brief oversight into these issues for consideration. Each of these issues can be explored in greater detail, how- ever, as their complexity can vary based upon the nature of a particular construction project. The Construction Contract In general, there are two types of construction contracts: a fixed price contract, or a time and materials contract. Most substantial construction projects involve fixed price agreements, whereas, smaller projects, which may only in- volve repairs, may be time and material agreements. It is important to decide which one of these contracts is best suited for your project prior to entering into contractual negotiations. A fixed price contract is one where the parties agree upon a fixed price for the entire completion of the project. In addition, fixed price contracts typically contain provisions concerning potential changes in the work. These potential changes are called change orders. It is important that the contractual change order language in a fixed price agree - ment is clear and concise and easily understandable by all parties. Further, as a manager or owner you should ensure that the contract contains a project timeline which sets forth both a start date and a completion date. Likewise, you should ensure that if there are project delays that the contrac- tor is responsible for any such delays, as well as any increase in prices due to such delay. One final suggestion in this limited review, is to request that the contract include a clause for termination of the contractor without cause at the conve- nience of the owner or project manager. This allows an owner or project manager to terminate a contractor at its own conve- nience without having to justify a reason for termination. These T
clauses are very beneficial to an owner or manager and should always be included if possible. In a time and materials con- tract, there is no set price as to the total cost for the completion of the work. There is typically an estimate at the inception of the project, however, the total cost of the project is based entirely upon the cost of the materials which the contractor supplies and installs, as well as the total amount of labor the contractor incurs in perform- ing the contract. Under such contracts it is very important that there be a clear recita- tion of the labor rates that the contractor is going to charge, as well as a clear recitation as to any markup regarding the materials which the contractor installs. The contract should also contain a provision which indicates that if there are any changes in the material rates or labor rates that the owner be notified of same for approval prior to completing additional work. Further, the contract should also contain a provision that if there is a substantial increase in the estimate to com- plete the work that the owner or project manager be notified immediately. Finally, another provision that should be in- cluded is a potential completion date. Project Management Responsibility For every construction proj- ect it is important that project management be put into place to oversee the entirety of the construction. This importance cannot be overstated. There are generally three options avail- able regarding project manage- ment. The first option would be to have the architect who drew the plans and specifica - tions for the project to serve as the construction manager. The next option would be to have the construction company who has the general contract for the construction to serve as the project manager. The final op - tion would be for a designated representative from the owner or property manager to serve as construction manager. If the owner or the property manager previously retained an architect to draw the plans and specifications for the proj - ect, it is often preferable to have this person serve as the project manager. This person’s responsibility would be to re- port to the owner or property manager regarding the status
of construction, any changes concerning the construction, and any issues which must be addressed during the con- struction process. Since this individual would be intimately familiar with the plans for the project, this is often the best person to serve as project man- ager, however, it does result in increased cost. This person would also serve as an inter- mediary to address any issues with the construction company for the benefit of the owner or property manager and would be their advocate in attempting to resolve such issues with the contractor. Another option would be to allow the construction com- pany to appoint its own con- struction manager who would report directly to the owner or property manager regarding the status of construction, any changes in the construction, any increases in the costs of construction, and any issues related to same. While this process could potentially work flawlessly, there can become an issue if the contractor becomes derelict in performing its du- ties. Under such circumstances, the owner or project manager could have a conflict with the construction manager from the construction company. Should this occur, then in that event, the owner or property manager will likely then have to retain their own project manager to intervene in order oversee the remainder of the construction and to act as their designated representative. The final option would be to have the owner or the property manager serve as the construc- tion manager for the project. While there may be some own- ers or property managers who can serve in this regard, in the absence of expertise in the construction industry this approach is not suggested. While the owner or property manager may ultimately save money initially, should there be substantial errors or issues with the construction the cost to complete the project could drastically exceed any sav- ings which may be obtained. As such, this approach is not typically recommended unless there is expertise by the owner or property manager. Starting the Project Once the contract is finalized and the appropriate roles are defined, the next step in this process is the commencement
of the project. There are several key issues which should be tak- en into consideration prior to the commencement of work on a project. The two main dates which are essential and must be clearly defined are the start date for the project and the anticipated completion date for the project. These dates should be agreed upon by all parties with appropriate mechanisms in place regarding damages the owner may be entitled to should either one or both of these dates are not met. Dam- ages which may result from project delays are typically referred to as delay damages and the contract should specifi - cally define whether the owner or contractor may be entitled to additional compensation should there be unanticipated project delays. The types of these clauses are numerous in nature, however, clear discus- sions should take place prior to the commencement of work as to these clauses in order to avoid surprise. Project owners or project managers should always seek to have a clause included in the contract that the contractor is not entitled to delay damages under any circumstances, but instead, may only be allowed increased time to perform its obligations under the contract equal to the amount of unanticipated delay. On the other hand, the contract should provide that if the contractor is directly re- sponsible for the delay, then in that event, the contractor may be liable to the owner for dam- ages related to the delay caused by its conduct. It is important when the contractual work is commenced that the owner or property manager understand the scope of the work to be completed under the construction agree- ment. This distinction is im- portant to ensure that the contractor does not attempt to charge the owner or property manager for work which they claim is additional work even though it is provided for un- der the terms of the original contract. Often, the project manager will get involved on behalf of the owner or property manager should there arise a dispute whether the work to be completed, or that was completed, was work within the original scope of the contract, or instead, was change order work for which the contractor may be entitled to additional
funds. It is for these reasons that a construction manager with detailed knowledge of the construction process be involved to ensure that the property owner or property manager is not taken advan- tage of by the contractor. This construction manager should ensure that any requests for additional work are strictly submitted to pursuant to the terms of the contract. Other- wise, should the change order work not be properly requested and properly approved prior to its performance then said work should not be compensable to the contractor under the terms of the construction agreement. Managing the Construction Phase Provided that the contractual provisions pursuant to which the parties have agreed are in place, the most important thing that could take place during a construction project is the proper management of this process by a qualified con - struction manager. Irrespec- tive of whether a construction manager is appointed, this process also needs to be care- fully overseen by the owner or a designated representative from the owner. There are several considerations which should be carefully monitored during this process. As discussed above, the prosecution of a work un- der a construction contract involves base contract work provided for in the agreement, as well as change order work due to changes in design by the owner or contractor or changes due to existing field conditions. It is extremely important that the difference between these phases of work be clearly defined and care - fully agreed upon before work is performed. It is also essen- tial that the contract contain precise terms regarding ap- proval of change order work prior to it being performed. Further, there must be strict adherence to these provisions to ensure that any change order work is reviewed, ap- proved, and agreed upon prior to the work being done. The last thing that you want to occur as a project manager or owner is for a contractor to submit large invoices for change order work which had not been previously approved. In general, if the contract is closely adhered to in practice continued on page 16C
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