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Construction manager can’t pass off cost overruns

CMR contract cut off indemnification rights

9_neih1027_hardhatA building contractor that entered into a “Construction Manager at Risk” contract for a public construction project could not obtain indemnification from the project owner for cost overruns allegedly due to design errors and changes, a Superior Court judge has ruled in a case of first impression in Massachusetts.

The defendant contractor, Gilbane Building Co., argued that a CMR contract — which shifts certain  risks relating to a public construction project onto the construction manager in exchange for a guaranteed price — does not override the common law rule that project owners are ordinarily liable for cost overruns due to design errors in the plans they provide.

But Judge Brian A. Davis disagreed, granting the project owner’s motion to dismiss Gilbane’s third-party indemnification claim.

“Given the material changes in the roles and responsibilities voluntarily undertaken by the parties in modern CMR contracts, the protections that Massachusetts courts historically have extended to construction contractors in the traditional design-bid-build context … simply are inapplicable to such contracts,” Davis wrote.

The 15-page decision is Coghlin Electrical Contractors, Inc. v. Gilbane Building Company.

‘Wrongly decided’?

Boston lawyer John W. DiNicola II appeared on behalf of defendant Gilbane Building Co. DiNicola declined to be interviewed, citing his client’s pending appeal.

John J. McNamara of Framingham represented plaintiff Coghlin Electrical Contractors, a subcontractor that is suing Gilbane to recover cost overruns.

Noting that his client was not directly involved in the indemnification dispute between Gilbane and the project owner in the case, the Massachusetts Division of Capital Asset Management, McNamara said he was surprised by the judge’s decision.

“Under basic state and federal construction law, the party that prepares the plans and specifications for a project and issues them is responsible if there are any claimed deficiencies,” said McNamara, who practices at Domestico, Lane & McNamara. “That’s called the Spearin doctrine.”

McNamara said the language of a CMR contract should not be interpreted to override the basic principle of the Spearin doctrine (which derives its name from the 1918 U.S. Supreme Court decision U.S. v. Spearin).

“A [CMR] contract clearly shifts management responsibility and some financial risk, but I don’t agree that it shifts design review and the financial risks associated with the design to the construction manager,” McNamara said. “This decision expands the scope of [construction managers’] potential liability for design-related issues.”

Construction lawyer Stanley A. Martin agrees that the case was wrongly decided.

“The judge appeared to fail to understand the nature of the construction management scope of obligations,” said Martin, of Duane Morris in Boston. “The construction manager does not take on design responsibility.”

Martin explained that construction management became the primary project delivery method in the private sector because of the advantage of having a construction manager provide feedback on the design at an earlier stage in the project.

“Construction management has now been adopted by this state in the public sector because you are getting the benefit of the contractor perspective before the design is finalized,” Martin said. “So you are getting that input, and the contract provides for that, but ultimately if there is an allegation that the design is improper, deficient or ambiguous, it’s not the construction manager’s problem.”

East Walpole construction attorney Jonathan P. Sauer also found fault with the decision.

“The judge misconstrued the indemnification clause” in the parties’ CMR contract, Sauer said. “That clause primarily has to do with property damage and personal injury claims.”

Sauer also disputed the notion that a CMR contract opens the door to design claims against the construction manager.

“How can you expect a contractor to guarantee what a design professional does?” Sauer asked. “Yes, the construction manager at risk does get into the construction process at an earlier point in time, but [the project owner] still [has] a designer. This decision basically ends the pass-through of this type of a claim on a public job.”

Framingham attorney Christopher J. Petrini represents public owners on construction projects and helped draft some of the provisions of the Construction Reform Act of 2004, the law that enacted the state’s CMR statute.

Petrini said Judge Davis got it right.

“If Gilbane’s claims were allowed to go forward, the public owner would be deprived the benefit of its bargain,” Petrini said.

Meghan Kelly, the deputy communications director for DCAM, said in an email that the ruling “will not fundamentally change construction law, but simply says that construction managers must abide by the contractual obligations that they themselves agreed to: to defend and hold harmless the state against claims by their own subcontractors.”

Public construction project

Gilbane Building Co. was the construction manager for the 320-bed state psychiatric facility built in Worcester between 2009 and 2012 for the Department of Mental Health. Gilbane performed its duties under a written CMR contract with DCAM.

Enacted in 2004, G.L.c. 149A, §§1-13 authorizes the use of CMR contracts as an alternative to the traditional “design-bid-build” project delivery method for public construction projects. A CMR contract generally shifts most of the design review, management responsibility, and financial risks associated with a public construction project to the construction manager in return for the construction manager receiving a “Guaranteed Maximum Price” — in this case $237 million.

The primary electrical subcontractor for the Worcester project was Coghlin Electrical Contractors. In 2013, Coghlin sued Gilbane in Superior Court, alleging it incurred additional costs as a result of Gilbane’s alleged mismanagement of the project. In particular, Coghlin alleged that Gilbane mishandled design changes to wall and ceiling areas.

In responding to Coghlin’s lawsuit, Gilbane filed a third-party complaint for indemnification against DCAM. According to Gilbane, DCAM as project owner was responsible for any damages caused by design changes and design errors that Gilbane could be required to pay Coghlin.

Indemnification claim dismissed

In moving to dismiss the third-party complaint, DCAM argued that Gilbane’s indemnification claim was barred under the terms of the parties’ CMR agreement. The contract imposed on Gilbane, as the construction manager, extensive planning and oversight duties.

In addition, the contract included a broad indemnification clause requiring Gilbane to “indemnify, defend and hold harmless” DCAM from and against “all claims, damages, losses and expenses … arising out of or resulting from the performance of the Work,” including without limitation “those arising or resulting from: labor performed or furnished and/or materials used or employed in the performance of the work.”

Gilbane countered that the terms of the CMR agreement did not override Massachusetts’ common law rule following the Spearin doctrine that a project owner that furnishes plans and specifications for a contractor to follow in a construction job impliedly warrants their sufficiency for the purpose intended.

But Davis concluded that a CMR contract alters the relationship between a project owner and construction manager such that the common law rule no longer applies.

“A Construction Manager working under a CMR contract takes on additional duties and responsibilities for the project, including, in the case of the [Worcester psychiatric hospital project], an ongoing duty to ‘review the design documents for clarity, consistency, constructability, maintainability/operability and coordination among the trades, coordination between the specifications and drawings,’” Davis wrote.

“With these added duties and responsibilities comes additional financial exposure for the Construction Manager in the event that something goes wrong,” he added.

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