Capital Construction Projects: Managing the Design, Financing, Risk Management and Project Delivery

1. Capital Construction Projects: Managing the Design, Financing, Risk Management and Project Delivery

2. Welcome! Ed Miller

3. Project Delivery and Contract Risk Allocation Frank T. Araps, Esq. Norris McLaughlin & Marcus

4. 1. Phases of Project Management Program Planning, Management and Implementation

6. 2. Selecting a Risk Sharing or Risk Shifting Philosophy for Contract Preparation

7. 3. Basic Project DeliveryForms and Variations

8. The Traditional Approach

9. The Design / Build Approach

10. C.M. as an Agent of the Owner

11. Contract Forms • Importance of integration of contracts • “vertically” between parties to the same project, and • “horizontally” between parties to related projects in the same space. • Useful contract forms: AIA B100-series design contracts integrated with A100-series contracts, A201 (large project general conditions), A205 (small project general conditions), A401 subcontract forms, and G-series project administration forms.

12. 4. Quality Assurance /Quality Control Project Checklist

13. QA / QC Project Checklist • Check drawings for proper coordination between trades. • Check that the information on the drawings conforms to the written word of the specification. • Read the boiler plate to see that it conforms, specifically and uniquely, to the project. • Enter into written agreements with design consultants, contractors, subcontractors and suppliers detailing exactly what are their responsibilities and are your responsibilities. • Review the work performed by consultants for conformance with your agreements.

14. QA / QC Project Checklist (cont.) • Check your final program against the estimate or budge to determine its current validity. • Communicate with your consultants so that a change wrought by one that affects the work or another is properly considered. • Include owners in the communication process to permit them the privilege of determining in advance how their money will be spent. • Establish a reasonable time frame for review of all relevant documents.

15. QA / QC Project Checklist (cont.) • Establish a reasonable duration for implementation. Very often the owner’s desire for a project by a fixed date is unreasonable or possible only at a cost far in excess of the cost estimate. • Specify scheduling, using one of the money available network scheduling techniques. • Review specifications to determine whether items specified are available.

16. QA / QC Project Checklist (cont.) • Check whether the information given by a sales representative or “sales engineer” is valid and conforms to the specification sheet prepared by the company represented. • Check the bids, quotation, or proposals for conformance with the contract documents. • Review the insurance requirements of the contract documents to assure compliance.

17. QA / QC Project Checklist (cont.) • Review the schedule carefully. Often the schedule as received is filed away without “approval” or “disapproval,” although there may be a specific contract reference to requiring your input. • Establish and adhere to an orderly system of controlling and tracking documentation relevant to all disputes, and to completion of the project. • Retain the backup information or supporting data for the approval, modification, or rejection of payment requests.

18. QA / QC Project Checklist (cont.) • React in a timely manner to requests for clarification or interpretation of the project documents. • Accept the responsibilities that are part of the contract documents. Where required assert the authority for coordinating the work of the various independent agents involved with the project. • Monitor the progress of the project and report objectively to the owner as required.

19. QA / QC Project Checklist (cont.) • Where appropriate assume responsibility for discrepancies and/or omissions in the project documents. • Issue clarifications and instructions in a timely fashion, that point out errors on your part and thereby eliminate or minimize your exposure.

20. Construction Insurance and Risk Management from a Legal Perspective Charles W. Miller III, Esq. Norris McLaughlin & Marcus

21. Risk Management “It’s Not Rocket Science…It’s Much More Complicated.”

22. Risk Management Process • Recognition of Risk • Risk Assessment • Developing Strategies to Manage Risk • Mitigation of Risk

23. Risk Management • Risk Control – limiting risk exposures. • Risk Financing – limiting payment due to risk exposures.

24. Construction-related Insurance • Builders Risk Insurance – Building coverage during the course of construction. • Commercial General Liability (CGL) Insurance – Third-party liability coverage. • Excess/Umbrella Liability Insurance – Broader/higher coverage for excess claims.

25. Construction-related Insurance • Workers Compensation Insurance – Employee injuries at work. • Pollution Insurance – Excluded in CGL coverage. • Professional Liability Insurance – Design and construction professionals. • Controlled Insurance Plan or “Wrap-up” Insurance – Comprehensive insurance program for all project participants.

26. Certificate of Insurance vs. Additional Insured Certificate of Insurance does not establish insurance coverage.

27. Statute of Repose vs. Statute of Limitation • Statute of Repose – begins at period following completion of services. • Statute of Limitations – begins at date of injury or discovery.

28. Example

29. Worker’s Compensation Night Watchman

30. Joe Smith - Neighbor • Commercial General Liability • Umbrella

31. Electrical Switchgear • Builders Risk

32. Business Income/Rental Income Loss under Builders Risk Policy Delayed Completion

33. Contaminated Soil • Pollution

34. Construction Liability Insurance and Risk Management from the Insurer’s Perspective Raymond Pavese and Michael Repko Pavese-McCormick Companies

35. The Construction Insurance marketplace is very restrictive. Contractors and developers who understand, control and effectively manage their risks will attain the most favorable pricing and terms.

36. What drives this marketplace difficulty? • Statistics-litigious society, unprecedented number of suits • Class Action Lawsuits • Claims from 3rd parties-your subcontractor’s employees • Failure to push claims to the responsible parties Being educated and understanding your insurance program is the basic fundamental of a successful construction insurance program.

37. Putting effort into being proactive, and not reactive about your insurance program definitely has a positive effect on your bottom line.

38. OK- So What is Construction Insurance? • It is the transfer of the financing of the defense and indemnity (payment) of certain events to a 3rd party for bodily injury to someone who is not your employee or damage to someone’s property.

39. What is Risk Management? • The identification of the possible exposures that can lead to incidents that would reduce your company’s assets • The transfer of some exposures to an insurance company • The assumption of some exposures by you or companies doing work for you • The retention of exposures

40. Coverages Typically Excluded From Standard Liability Policies • Pollution – discharge of fuel • Professional Liability (architect errors & omissions) • Employment Related Practices – harassment suits • Breach of Contract • Mold, Mildew and Fungus • Asbestos • Work Outside Your Class of Business – ( i.e. a building contractor constructing a bridge or a commercial contractor building a home) • Geographic Restrictions – NY exclusions due to labor laws. NY pricing is a multitude of a difference. • Terrorism Coverage – can be added for additional premiums

41. What Happens to the Risks That Are Not Covered By a Standard Insurance Policy? • Some of these risks can be insured by specific specialty insurance policies • Some can be transferred to other parties to the contract through a process called “Contractual Risk Transfer” • Contractual Risk Transfer (CRT) can be achieved by using certain contracts and requiring certain provisions on insurance certificates.

42. Yes, a small amount of risks are simply economically infeasible to insure such as: • Breach of Contract • EFIS (Exterior Insulated Finish Systems) – For EFIS, coverage is available but it is not cost effective Are There Any Risks That Are Not Usually Insured Or Transferred?

43. Here is an example of an account I recently worked on: A GC was under contract to do a $1,150,000 exterior upgrade to a 20 year-old 10-story building in Atlantic City. The cost of Liability Insurance, which included EFIS was 101,000/9% of the contract. The contractor elected to self insure the EFIS and purchased the project insurance for 22,000/2% of the contract.

44. Where Is the Balance In All of This? If a contractor/developer cannot insure or transfer all possible risks, how can you go about your business in a reasonably safe manner? • The balance will be for you to make informed decisions and…

45. Control Your Exposures With a Contractual Risk Transfer Program Why? Example—if you are sitting at a red light and the car behind you bumps you, are you going to call your insurance company or theirs? We all know the answer. • When something happens at your job, you will be named in a suit/claim, and you do not necessarily need to rely on your own insurer to defend and indemnify you. CRT applies to plumbers, electricians and painters as well as asbestos sub-contractors. • By “Tendering” the claim down to the responsible party, you will then be preserving the future marketability of your insurance coverages (just like your actions at the red light). • You avoid the distraction of focusing on the defense of the claim. • *See samples 1, 2 and 3 in the appendix.

46. CRT CRT CRT Contractual risk transfer obligates the insurers of certain parties in a business arrangement to defend and indemnify the parties that they are contractually performing work or a service for: How Does Contractual Risk Transfer Work? Typical Hierarchy of Contractual Risk Transfer 1st Tier – Owner 2nd Tier – GC/CM/Architect/Engineer 3rd Tier – Subcontractors/Sub Consultants 4th Tier – Suppliers When executed correctly, the top tier in the Hierarchy has the largest amount of insurers obligated to defend and indemnify them in the event of losses on a project.

47. OK, now that policy exclusions and Contractual Risk Transfer practices are understood. What else is important about construction insurance and risk management? • Know the insurance requirements of your customers and check to see if your insurer can deliver those conditions before you enter into a contract. • We have seen job delays over this as well as financial surprises. • Example – Most owners and upper tier parties in a contract will require your insurance carrier to add them to your policy as an additional interest.

48. This policy change comes in two forms: A. For the job duration only B. For the job duration and after the job is complete (see appendix) Not all carriers offer Coverage B, and those who do charge additional premium for that. *See samples 4 and 5 in the appendix.

49. 2. Understand that the pricing of Liability policies is developed by project segmentation. From an actuarial standpoint, commercial buildings carry a lower premium because no one lives in them and condominiums carry the highest price because the contractor is exposed to class action law suits.

50. 3. Understand Completed Operations – In NJ, a contractor/developer can be held liable for 10 years after the completion and if you cease your insurance policy; the completed operations coverage would need to be purchased as a “Tail” basis.