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How to manage a construction project

By Paul Norris, Stark & Stark, PC

The proper management of a construction project is a daunting task for either a property owner or a management company which must be carefully monitored. There are several key areas which an owner or property manager should consider when managing 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, however, 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 involve 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 agreement 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 contractor 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 convenience of the owner or project manager. This allows an owner or project manager to terminate a contractor at its own convenience without having to justify a reason for termination. These clauses are very beneficial to an owner or manager and should always be included if possible.

In a time and materials contract, 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 performing the contract. Under such contracts it is very important that there be a clear recitation 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 complete the work that the owner or project manager be notified immediately. Finally, another provision that should be included is a potential completion date.

Project Management Responsibility

For every construction project 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 available regarding project management. The first option would be to have the architect who drew the plans and specifications 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 option 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 project, it is often preferable to have this person serve as the project manager. This person’s responsibility would be to report 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 construction process. Since this individual would be intimately familiar with the plans for the project, this is often the best person to serve as project manager, however, it does result in increased cost. This person would also serve as an intermediary 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 company to appoint its own construction 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 duties. 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 construction manager for the project. While there may be some owners 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 savings 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 taken 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. Damages which may result from project delays are typically referred to as delay damages and the contract should specifically 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 discussions 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 responsible for the delay, then in that event, the contractor may be liable to the owner for damages 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 agreement. This distinction is important 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 under 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 advantage 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. Otherwise, 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 construction manager. Irrespective of whether a construction manager is appointed, this process also needs to be carefully 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 under 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 carefully agreed upon before work is performed. It is also essential that the contract contain precise terms regarding approval 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, approved, 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 such unanticipated invoices are null and void pursuant to the terms of a well written contract. On the other hand, if the owner or project manager does not adhere to the terms of the change order provision the contractor may be able to argue that such enforcement has been waived. It is for these reasons that any change order provision must be strictly followed and construed.

Key Issues During the Management of the Construction Phase

During the construction phase of the project, there are key issues which the owner and the owner’s representative should keep in mind as the project progresses. As discussed above, one of the key things the owner or project manager must do is ensure strict adherence to the change order provision of the contract regarding extra work and/or base contract work. Aside from that issue which arises in virtually every project, another main issue that must be continuously addressed is keeping the contractor under control.

Unless the project is small, contractors typically submit applications for payment on a monthly payment for review by the owner or the owner’s representative requesting a certain amount of payment based upon percentages of completion of the work under the contract. The contractor requests payment based upon the payment application and their evaluation of the work that they completed. It is critical that the owner or owner’s representative carefully review each payment application, as well as the work completed on site to determine the accuracy of a payment application prior to issuing a payment to the contractor. Often times, contractors may attempt to claim a higher percentage of completion to ensure a higher payment rather than what was actually completed. As the owner or property manager you must ensure that the contractor never gets in front of you as far as payments it is entitled to. If the contractor starts to receive substantially more than it is entitled to the project could become in jeopardy should there be issues with the contractor completing its work.

If there are issues with the work that was completed by a contractor, it is very important that those issues be addressed as they come to light instead of waiting until the completion of the project. Attempting to resolve any such issues at the completion of a project could prove fatal to the construction project, and further, will only make the issues more difficult to resolve. If an issue is discovered it should be immediately raised with the contractor, it should be documented in the form of written notification to the contractor, and appropriate photographs or videos should be taken of the issue. Typically, the contractor will be given an opportunity to correct or cure a purported issue. Should the contractor not correct or cure the issue, however, a back charge may be issued against the contractor equal to the amount it will take to resolve the item. Further, the owner or project manager should withhold money to the contractor until such issues are addressed. It is extremely important that documentation and notification be provided and that any issue be addressed immediately rather than at the conclusion of the project. Staying on top of the contractors and subcontractors will ensure that the issues are addressed, and the project is successfully completed.

Should there be issues with the completion of the project due to delays not the fault of the owner or project manager, it is essential that pressure be continuously applied upon the contractor to complete those items. Should there become an impasse where the contractor or subcontractor fails to perform, then in that event, it may become necessary to assess a back charge, to carefully document same, and to have that work completed by an alternate contractor. The cost that the owner may incur to correct the improperly performed or incomplete work would be a deduction from the contract to which the contractor may be entitled to. Once again, documentation and notification are essential.

Closing Out the Project

Once the project is nearing completion, there are several issues that should be kept in mind as the project draws to a close. Never take your eye off the prize, as it is critical that a project is properly closed out for both the owner and property manager. In closing out a project, there are two concerns which are directly related.

First, any construction agreement should have a retainage provision whereby a certain percentage of the total contract amount is held back from the contractor pending the issuance of a certificate of occupancy, and further, satisfaction by the owner that all work has been completed in accordance with the terms of the contract and any approved change orders. Oftentimes, punch lists are created by the owner or the owner’s representative which detail items which must be completed prior to retainage being released to the contractor. It is crucial that this process be strictly adhered to and carefully reviewed by the project manager and the owner. Otherwise, it is very difficult to get a contractor on site to complete these items if they have already been paid in full. The best time to ensure their completion is by withholding the retainage until the items are completed in their entirety.

The final thing that an owner or project manager must do is obtain lien releases from the contractor. In other words, the owner wants the general contractor to obtain releases from both itself, as well as any of its subcontractors, suppliers, or vendors whereby they certify that they have been paid in full for the work they provided for the project and that they waive any claims against the project. This provides the ultimate protection to ensure that the property owner is not sued by any of these potentially unknown parties even though it may have paid the contractor in full for the materials and services it provided. It is strongly suggested that retainage not be released until such releases are obtained. Upon receipt, the retainage can be released, and the project can be concluded with the contractor essentially turning over the keys to the owner.

This is only a brief oversight as to how to successfully manage a construction project. The commencement of a construction project is a formidable process, however, can be successfully completed provided appropriate precautions and preparation are undertaken.

Paul Norris is a Shareholder at Stark & Stark, PC.