Podcast Highlights (No. 1): Design Professional's Guide to Construction Law

As the litigation and dispute resolution division of the Forum, D1 members deal with a variety of aspects of construction law and many are discussed on the Forum’s podcast “Construction Law Today.” This podcast was established in 2019 and created by Buzz Tarlow, one of D1’s ADR neutrals. As an additional benefit to members, the D1 blog is spearheading a series summarizing the Forum podcast episodes.

Episode 22: Design Professional’s Guide to Construction Law

(Click title for the full podcast episode)

This is a summary of the podcast discussion, which focused on the new book “Design Professional’s Guide to Construction Law”, published in 2021,  and edited by the three guests Matt Ninneman, Buck Beltzer, and Mark Mercante. Their practice expertise ranges the whole gamut from transactional to insurance risk management, litigation, arbitration, and acting as arbiters. Unlike the previous edition of this book, that covered construction manager issues along with design professionals, this edition focuses only on design professionals and emphasizes risk management strategies for attorneys to use when counseling these professionals. It also includes recent developments in legislation and case law. 

This book was developed because design professionals are at greater risk than most project participants due to variations in state law, updates to contract forms, and shifts in project delivery systems, with an increase in construction-manger-at-risk projects and end-design builds, which have created new risks for which designers and legal practitioners, did not traditionally account. For example, on the design-build side, there is risk that design professionals may face the same treatment as subcontractors, with offsets, etc. On the construction-manager-at-risk side, design professionals begin working with general contractors earlier in the development of the entire project and there is case law that suggests that design professionals, unless it is stated otherwise, might take on additional risk as representative of the owner. Furthermore, design professionals have weakened ability to minimize risk as projects progress. For example, design professionals, particularly subconsultants, can find themselves doing large expensive projects with sophisticated designs that require licensure and significant education and if the contractor does not build in accordance with the plan and makes changes without the designers’ input, the design professional is stuck in the middle with risk on both sides with the typical design professional malpractice insurance policy eroding, with defense costs being taken out of policy limits.

The book examines ways to minimize risk within the contract setting, including consequential damage waivers, waiver of subrogation and setting limitations of liability to the design professionals’ fee or insurance coverage limits, or some set number to which the design professional can agree. On a related note, the book includes a rewritten examination of insurance policies and how to minimize risk using them. This includes a review of standard language, like indemnity provisions. What are they? What restrictions are there on indemnity provisions? Who is covered? What is covered? Who has a duty to defend and when is it triggered? What are coverage positions of former employees? What is the impact on additional insureds? What is excluded from coverage? What is contractual liability? What is the warranty language? What is heightened standard of care? (and more)…

Readers of this book will also see an in-depth examination of numerous doctrines, including heightened standards of care; betterments—which has been better developed recently; and the economic loss doctrine, which has evolved and varies by state. The book also addresses recent modifications to AIA form provisions which incorporate recent state legislation and important case law developments that should be incorporated into design professionals’ form contracts. 

Another specially treated issue in the new book is licensing, including the stamping and sealing obligation of various states. (FYI, the Forum’s Division 3 has a 50-state survey on this issue.) The vast differences in process and procedure are quite surprising.  For example, who is stamping? When do you stamp? What are you stamping? What is the reporting obligation for malpractice? What is the scope? Is there a threshold value? Each state has some expectations for self-reporting, which are also addressed. Finally, the text touches on intellectual property, and how to protect specialized knowledge of structures and advancements in engineering.

In summation, this book is a valuable resource for practitioners and the design professionals that they counsel, as it is comprehensive and current, addressing new trends in the industry that all players must know and incorporate into their contract negotiations and risk management planning.

Blog contributor Kanita Williams is the Principal at The Law Office of Kanita C. Williams, PC, in Washington, DC. Her practice is criminal litigation, real estate and landlord/tenant matters, and construction law.

View from the Field Part 1 - The Keynote Presentation and Segway to the Field

The foundation for this series of posts is the ABA Forum on Construction Law Meeting in October 2021 – Effective Project Management & Strategies: Turning Hindsight into 20/20 Foresight. The keynote speaker was Edward W. Merrow, Founder and President of Independent Project Analysis, Inc. (IPA). Mr. Merrow delivered an authoritative and compelling presentation Why Megaprojects Fail So Often and Why You Should Care No Matter the Size of Your Client’s Project. The presentation was moderated by Andy Ness, JAMS, Washington DC. Many of us know Andy as 2012-13 Chair of the ABA Forum on the Construction Industry.  Currently and additionally, Andy is Director at Large, Project Management College of Scheduling. Mr. Ness offered an extensive paper on the same subject, noting “This paper is written from viewpoint of the construction lawyer.”

I attended this ABA presentation, and have been a longtime follower and advocate of Mr. Merrow’s managerial and project development/delivery process. In 2013, I authored a (four part) series of articles for this blog. Mr. Merrow’s publication, Industrial Megaprojects, was a primary source for this set of articles and for Mr. Merrow’s recent presentation. This series of follow on posts are an extension of my 2013 articles, and may provide a framework for understanding some of the disputes we see in our industry. These posts are offered from the viewpoint of a practitioner on the jobsite, not an attorney.

For decades, I have been assisting clients in the proper development of project “Front-end’s” as well as managing “troubled projects” where the Front-end (or other managerial issues) have resulted in significant project management problems. Engagements included project practitioner as well as testifying expert.

Over the past six years, I have been in key roles on in-progress industrial megaprojects. Two assignments were project management-related, in the field, for prime contractors with construction based on fixed price (design-bid-build). The third was project management advisor for the owner (at project director level) during construction of a grassroots refinery. The contract approach was lump sum turnkey (EPC lump sum).

Mr. Merrow’s High-Level Findings

In Mr. Merrow’s presentation, he advised and emphasized that only about 35% of Megaprojects are successful. By contrast, major projects less than $500 million have a success rate of approximately 63% (hence even these projects experience a failure rate of one-third). Key metrics are: Cost Index, Cost Growth, Execution Schedule Index, Execution Schedule Slip, and Production Problems. Mr. Merrow’s theme for success – “The Front-end Makes the Megaproject.”

After Mr. Merrow’s presentation, I conferred with him and he confirmed key points in his current presentation and experience to be consistent with observations in my 2013 Dispute Resolver articles.

The summary, highest level findings (regarding Megaprojects) of Mr. Merrow’s presentation are:

• The Front-end makes (or breaks) (is essential for success of) the Megaproject
• Sponsors of Megaprojects have three critical responsibilities:
• Shaping – shape the project such that stakeholders are aligned
• Basic Data – technical data are correct and complete
• Front-end Loading – fully define the project before starting execution
• All of these are owner responsibilities alone (i.e., not contractors).

Megaproject Contracting Approaches (with many variations) (per Mr. Merrow):

• EPC Lump-Sum (Fixed Price)
• Reimbursable EPC and EPCm
• Integrated Project Delivery aka Alliancing
• Mixed (Design, Bid, Build)

Mr. Merrow addressed Megaproject Outcomes and Contract Types. The “Mixed” is the only approach that improves megaproject outcomes. EPC-LS and EPC/m reimbursable forms produce average results. IPD is disastrous for megaprojects, even though they are often reasonably well-prepared. Owner rating of Prime Contractor’s performance show EPC LS (26% Good, 30% Poor), EPC/EPCm Reimbursable (9% Good, 58% Poor), IPD (7% Good, 86% Poor), and Mixed (64% Good, 0% Poor).

Key points in Mr. Merrow’s summary of “Mixed” Contracting Approaches are:

• FEED, detailed engineering, and procurement by one firm, CM and construction performed by other(s) (Design-bid-build).
• Construction is usually lump-sum, CM sometimes owner-performed.
• Mixed form removes most of the FEED-associated moral hazard
• Dramatically lowers the risk profile for the contractors due to time-related risks.

Why Study Industrial Megaprojects?

Given Mr. Merrow’s findings, it is legitimate to question the value since most projects, although they may be large and/or complex, are not industrial megaprojects. The reasons are:

• Problems are similar on large & complex projects (not Megaprojects) – lessons learned
• Large & Complex success is 60%+, failure is +/-30%
• Formulas for success are valuable models for planning and execution of large and complex projects (not Megaprojects).

View from the Field – The Overview

Drilling down into a more granular level of detail, the issues may be embellished through the eyes of a practitioner (in this case, mine).

Interfaces – Mr. Merrow presented an extensive list of “Typical Characteristics of Megaprojects.”  His explicit characteristics include “Large number of interfaces” and “Multiple partners, stakeholders and other ‘interested’ parties.” In addition, the “Mixed” contracting approach introduces multiple interfaces that are transparent to the owner in other approaches (e.g., EPC-LS).

Every added interface adds managerial demands and complexity. Owners may (or may not) have the staff and expertise to deal with these additional interfaces.

Major implications (other):

• Asset Performance – ability to be placed into commercial operation at a capacity that us planned per specifications.
• Execution Planning – choosing the optimum (or an acceptable) strategy and contracting approach along with execution details.
• Scope of Work – correctly and robustly define the scope, including complete interface coverage (minimal gaps), that is sufficient to complete other planning that relies on scope definition.
• Time Management – preparation and implementation of a time-based managerial baseline.
• Cost and Progress Management - preparation and implementation of a cost and project managerial baseline.
• Procurement (including contracting) – multiple contracts (and possibly purchase orders) must be developed, awarded and administered.
• Data Management – preparing and implementing a data strategy along with use in managing the work.
• Labor Productivity – managing the risk of labor costs exceeding budgets due to inefficiencies or inadequate baselines.
• Completion Management – managing the transition from construction to operations (e.g., revenue-producing).
• Risk Allocation – allocation of a given risk to the party that is most capable of assuming and managing the specific risk.

View from the Field – Interface Management

Part 2 of this series will address the challenges of Interface Management that is required when using “Mixed” contracting approach.

Author George T. McLaughlin PMP CCM has worked worldwide in this industrial marketplace since the early 1980’s. He serves Owners, Prime Contractors, and Subcontractors. Mr. McLaughlin was president and COO of a $35 million engineering and construction (mechanical, controls and electrical) contractor for five years. For the most part, Mr. McLaughlin’s work is performed on-location where the relevant work is being performed hence the title “view from the field.” Mr. McLaughlin is a principal of McLaughlin & McLaughlin out of Austin, Texas. In this role, he provides program and project management services as well as litigation support services. His contact information can be accessed at his website (www.mclaughlinandmclaughlin.com) and blog (http://projectprofessionals.org/).

Should You Use the DRB or Go Straight to Arbitration?

Dispute Resolution Boards (“DRBs”) continue to grow in popularity, particularly for major infrastructure projects. As such, we can expect that construction lawyers will increasingly be advising clients on whether to send a dispute to the DRB or go directly to arbitration. In this post, we outline a few of the factors that may inform whether your client should submit a dispute to the DRB or go straight to arbitration.

DRBs (also known as “Review Boards”) are most common in major infrastructure projects. They typically consist of three independent and impartial experts, such as engineers. Lawyers can also make up the DRB. The DRB is actively involved in the project from its inception so its members are familiar with the parties and need little time to get up to speed on the events leading to a dispute.

When disputes arise, the parties may refer it to the DRB. The DRB will then typically investigate the dispute, hear submissions from each side through an informal process, and render either a binding or a non-binding opinion, depending on the nature of the DRB. The precise process followed by a DRB depends on the terms of the applicable contract.

DRBs usually play a very important role in major projects by dealing with issues as they arise on site. By providing prompt decisions, they allow construction projects to proceed without delay. Real-time prevention and resolution by the DRB often promotes open communication, trust, and cooperation between the parties.

When considering whether to refer a dispute to the DRB, clients may be concerned that most DRB decisions are non-binding recommendations. There is a risk the parties will still need to arbitrate (or even litigate) after a DRB recommendation is rendered. Fortunately, it appears that the vast majority of disputes resolved by DRBs do avoid further dispute resolution steps.¹

However, DRBs may also have some downsides. In Canada, there are reports that parties are increasingly seeking a lawyer to chair the DRB committee because of their knowledge of legal processes.² The emphasis on legal procedure may erode the cost and time-saving benefits of the DRB while leaving the parties without the benefits of arbitration, such as finality of the decision.

Moreover, the nature of the dispute may not be within the DRB members’ expertise. While members of the DRB with engineering expertise may be well positioned to adjudicate technical disputes, claims involving contract interpretation and other legal matters may be outside their expertise. Such disputes might be better left to an adjudicator with legal training.

Parties should also consider whether they will end up arbitrating or litigating related disputes. In one high profile project involving the construction of a subway station in Toronto, Canada, one dispute was resolved through the DRB but over 40 individual claims are still being litigated.³ If the parties are already incurring the expense of complex litigation, there may be little benefit gained by hiving off one issue for a separate hearing through the DRB.

The DRB’s heavy involvement in the project can sometimes be problematic too. Depending on the relationships that form on site, parties may benefit from the fresh perspective of an arbitrator who is new to the project. An arbitrator may alleviate any concerns about bias from members of the DRB who have worked on site for months or years.

Overall, DRBs are usually an excellent option for resolving disputes in real time on site. However, it is still important to weigh the other dispute resolution options carefully before choosing to proceed with the DRB.

Author Laura Brazil is a partner in the Toronto office of McMillan LLP. Her practice is focused on construction and real estate disputes. She primarily acts for owners and contractors but also represents subcontractors, material suppliers, designers and other members of the construction pyramid.

Author Anthony Labib is an articling student in the Toronto office of McMillan LLP. He is a graduate of Western University’s Faculty of Law.

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1 “Construction Dispute Resolution Arbitration and Beyond”, American Jurisprudence Trials, August 2021 Update, by Thomas H Oehmke and Joan M Brovins.^↩
2 https://canada.constructconnect.com/dcn/news/government/2019/10/dispute-resolution-board-use-on-the-rise-in-canada.^↩
3 Walsh Construction Company Canada v. Toronto Transit Commission, 2020 CarswellOnt 8055, 2020 ONSC 3688.^↩

Apply to Become a Diversity Fellow with the ABA Forum on Construction Law -- And Perhaps Join Division 1's Steering Committee

The ABA Forum on Construction Law is now accepting Diversity Fellow Applications through Monday, January 31, 2022.  Don't let that January date slow you down . . . APPLY AS SOON AS POSSIBLE.  This is highly competitive program with the Forum.  The Forum's prior and current Diversity Fellows are throughout Forum leadership and excellent construction attorneys / Forum volunteers.  The benefits of this fellowship program cannot be understated, including an opportunity to join a steering committee (Division 1 would happily welcome you 😁!)

More detail about the Diversity Fellowship 2022 is below.  

The Forum’s leadership has initiated a fellowship program for diverse construction lawyers with the goal of drawing diverse construction lawyers into the ranks of active, long-term Forum members.  The Forum’s Diversity Fellowship is intended to identify diverse construction lawyers who have demonstrated interest in the Forum and are therefore potential candidates for future Forum leadership. Currently, the Forum awards up to six (6) three-year Fellowships each spring.  Fellows receive the following benefits: •       Waiver of all registration fees for the Forum’s Fall, Midwinter, and Annual Meetings;  •       Reimbursement of reasonable travel and accommodation expenses associated with attending the Forum’s Annual Meeting held each spring (not to exceed $1,500 per annum); •       Waiver of Forum membership dues;  and •       Payment of ABA membership dues in the following amounts:  100% in Year 1; 66% in Year 2; and 33% in Year 3. Additionally, Fellows are afforded the opportunity to join the steering committee of one of the Forum’s fourteen (14) Divisions, and if desired, the Forum will arrange a mentor for each Fellow, appropriate to that Fellow’s needs (e.g. career advice, guidance on navigating Forum meetings, leadership, committees, etc.). While all submitted applications will be considered, the ideal candidates will have between three (3) and twelve (12) years’ experience in construction law.  Fellowship recipients are expected to attend the Forum’s Annual Meeting in the spring and are strongly encouraged to attend the Fall and Midwinter meetings.  The Forum’s 2022 Annual Meeting will be held May 4-7, 2022 in New York, NY. Completed applications must be received on, or before, Monday, January 31, 2022.  The application deadline will not be extended.    Application submissions should be sent to ABAFCLapp@americanbar.org and ksherwin@winstead.com.  If you have any questions about this program, please contact Kristen Sherwin  (Chair, Diversity Fellowship Subcommittee) at  ksherwin@winstead.com *** Posted by Tom Dunn, Chair of Division 1.  If you want to chat with me about this, feel free to reach out at rtdunn@pierceatwood.com.