CE 366 EXAM #1

Construction Industry Statistics : ____ trillion total annual volume ____ of U.S. GDP ____ of projects are privately financed ____ are paid by various public agencies

$1.3 4.3% 73% 27%

Basic Types of Construction Claims :

(1) Contract Documents • Defective plans and specifications • Spearin Doctrine: Owner liable to contractor, e.g. plans warranty (2) Negligent Misinterpretation • Contractor can sue engineer • When a professional performs his/her duties improperly out of ignorance or carelessness

Comparison of Construction to Manufacturing

(1) Manufacturing : - Products typically designed and produced without a designated purchaser - smaller units, larger batches - easy to advertise (2) Construction : - Worksites are not permanent - Finished product is unique - Requires highly skilled craftsmen - Capital is locked (more risk) - Operators are subject to weather - Owner is typically highly involved **Despite some prefabrication, construction cannot convert to manufacturing practices

Construction Project Stages :

(1) Planning and Definition (2) Design (3) Procurement and Construction

Construction Management :

- Agency CM : Manages on behalf of the owner - CM at Risk : Combines ACM and Negotiated GC

General Partnership

- Agreement between two or more individuals - Partners are co-owners - Written Articles of Partnership

Project Management Perspective :

- All projects associated with construction require management - Any project must be managed to optimize outcomes - Project management perspectives include: General contractor Specialty contractor Designer Owner

Stakeholders: Prime Contractor

- Business firm that is in direct contact with the owner for the construction project - Brings together all elements and inputs of the process into a single, coordinated effort - Also known as general contractor (GC)

Segments of the Industry: Mixed Use

- Combination of commercial and residential (e.g., retail stores and apartments) - Structures are typically made of concrete or steel - Designed by architects with engineering help - Subcontracted to specialty contractors

Stakeholders: Sub-Contractor

- Construction firm that contracts with a GC to perform specialized portions of the scope of work - Contractual relationship is limited to these two parties without owners involvement - GC maintains contractual responsibility to owner for subcontractor's work

Stakeholders: Architect/Engineer

- Design professional is the party, organization or firm that designs the project - Contracted by owner early in the construction process - Sometimes in permanent relationships with owners (corporate partnerships)

Individual Proprietorship :

- Easiest and least expensive to establish - Proprietor owns/operates all transactions of business in his/her name - Maximum degree of freedom from governmental regulation Requirements • Insurance • Tax registration • Business licensure Note: Personal assets are at risk

Segments of the Industry: Industrial

- Emphasis is placed on permanency - One specialty contractor completes the work with few subcontractors - Highly technical in nature - Typically designed by process engineers - Require support from a variety of design engineers - Privately funded

How is the construction industry employment ?

- Employs 7 million workers per year - Represents 6% of all private employment - Includes approximately 1,200,000 firms (most are small) - Over 70 contractor associations (ABC, AGC, etc.) - Approximately 750,000 firms do not have an active payroll - Average number of employees per firm: 9.5

What is the economic impact within the construction industry ?

- Every $1 spend on new construction generates $3.60 in economic activity in other industries - Every $1 billion of new construction creates 50,000 new jobs - 13,000 jobs in the construction industry - 34,000 jobs in supplies and services

Construction Management Procedures :

- Every construction project is unique due to physical, economic, and stakeholder variables - All construction projects have common processes : Mobilization Change management Procurement, etc. - Unique project outcomes are achieved by varying the inputs to the standard process

Surety Bonds - Issued through rigid underwriting which considers:

- Experience of the contractor - Contractor work load - Nature of the project - Type of owner - Bidding results - Contract terms

Stakeholders: Public Owner

- Local boards, commissions, and authorities - Must proceed in accordance with applicable statutes and administrative directives - Advertising for bids, bidding procedures, construction contracts and contract administration - Act in the interest of the public - Financed through bonds and taxes

Segments of the Industry: Commercial

- Office buildings, high-rise residential, warehouses, retail stores, shopping centers, etc. - Structures are typically made of concrete or steel - Designed by architects with engineering help - Heavily subcontracted to specialty contractors

Construction projects involve many stakeholders (with various goals), name types of stakeholders ?

- Owner (private, public, private+public) - Architect/Engineer - Prime Contractor - Sub Contractor

Segments of the Industry: Heavy Civil

- Owner is government and projects are publicly financed - Typically horizontal projects - Highways, canals, tunnels, dams, railroads, pipelines, bridges, airport runways, sewers, harbors, subways - Construction by a general contractor - Heavy equipment oriented

General Partnership Common Risk :

- Partners are individually liable for all debts of the partnership - An injured partner may claim against other partners - If a partner withdraws, he/she is responsible for all obligations up to the time of his/her withdrawal

Stakeholders: Private Owner

- Partnerships, corporations, and Individuals - Goal to make a profit or satisfy a need - Financed by lenders - Regulate interests by contract - Some play active role in design and construction phases - Many industrial and public owners have established their own construction organizations

Stakeholders: Public-Private Partnerships (PPP)

- Private cooperation partner with the government to deliver a project - Private cooperation builds and operates the facility for a while (BOT) - Regulations similar to public ownership - Used as a financing tool for major infrastructural projects example : Folly Beach Express Bridge in Orange Beach AL

Segments of the Industry: Residential

- Produce single family houses or apartments - Use dimensioned lumber "stick built" - Hire the designers - Subcontract most of the work

Best Value

- Selection is based upon a mixture of price and qualifications

• Competitive Bidding

- Selection is based upon price

Negotiation

- Selection is based upon qualifications

Design - Construct

- Single point of responsibility for the owner

Surety Bonds - Surety bonds are not insurance:

- Three-party instruments - Presuppose no losses - Premium is actually a fee - Losses of any kind are covered - Indemnification of surety by principal

Management of construction :

- processes is essential if - Price and schedule constraints are to be realized - Safety is to be guarded - Customer relations are to be maintained - Continuous improvement is to be attained

Construction projects are categorized as ?

- residential - commercial - heavy civil - industrial

Research and development account for about ____ of annual sales (automotive, chemical and others >5%)

1%

The construction industry represents a large component of the national economy. In the United States... Value of Construction? Construction = ____ of GDP Employs= ~_____ million people Average size of a construction company = ?

1. $1.3 trillion 2. 4.3 % of GDP 3. 7 million 4. 9.5

Prequalification

1. Capacity 2. Capital 3. Character

Mitigate Problems: Communication

1. Change Orders 2. Documentation

Project Delivery Systems : A project can be packaged in a variety of ways, name those ways ?

1. Design - Bid - Construct 2. Design - Construct 3. Construction Management

Typical Contracting Process :

1. Design complete 2. Pre-qualify constructors 3. Advertise and request for bids 4. Bids received 5. Open bids and determine low bid 6. Low bidder submits bonds and documents 7. Award contract 8. Preconstruction conference 9. Notice to proceed 10. Monitor, payment schedule 11. Closeout, walk-through, punch-list 12. Final payment, warranties

Business Ownership and Company Organization :

1. Sole / Individual Proprietorships 2. (General) Partnership 3. Limited Partnership/ Limited Liability Companies (LLC) 4. Corporations

Construction often ___________ the status of the economy The construction industry is currently ______ The construction industry is a ________ of the U.S. economy

1. predicts 2. growing 3. vital part

In the construction industry what percentage does the engineers work for ?

11%

The Construction Project :

: the organized effort (temporary endeavor) to create a unique building. - Tailored to suit its environment - Arranged to perform its own function - Designed to reflect personal tastes and preferences - Temporary means each project has a definite beginning and end

Construction statistics : Economic recession

= more government projects to stimulate the economy

Construction statistics : Economic prosperity

= more privately funded projects

Terminating a Contract :

A contract can be terminated or ended in any one of four ways: 1. Performance 2. Agreement 3. Frustration 4. Breach

Project Delivery Systems, name them ?

A project can be packaged in a variety of ways (1) Turn-Key and BOT - Minimize owner involvement (2) Integrated Project Delivery - Shared risk and reward across all stakeholders

What Are Surety Bonds?

A surety bond offers assurances to the owner of a construction project that the contractor will perform the work specified in the contract and pay certain subcontractors and suppliers. Parties involved: - Principal (constructor) - Obligee (owner) - Surety (bonding company)

Hold Harmless:

Assure that the other party is not to blame and will not be blamed by yourself for your own wrongdoing

Types of Surety Bonds :

Bid Bond • Performance Bond • Payment Bond

Modeling Construction Constructors : build a product based on models Drawings - ? Specifications - ? Schedules - ? Estimates - ? Lean (efficient) construction - ? BIM ?

Drawings - graphical model Specifications - verbal model Schedules - time based model Estimates - cost based model Lean (efficient) construction - production model BIM - integrate the various models

Submittals:

Drawings or samples from designer/fabricator • Assures that product complies with intent/help communication

Elements of Contracts

I. Offer and acceptance II. Consideration III. Meeting of the minds IV. Lawful subject matter V. Competent parties

Options for Surety Bonding Company

If GC defaults... - Re-bid the job for completion - Arrange for replacement contractor - Retain original GC (provide trained personnel or financial assistance) - Reimburse owner as required by the bond

Types of Clauses :

Incorporation clause Merger clause

Contract Intent

Organize and document thoughts on decisions - Not to punish or serve as a litigation tool - Contracts DO NOT make good projects • Types of contracts: - Design, - Construction maintenance, - Design-build, - Bond, - Insurance, - Build-Operate-Transfer (BOT), - Equipment leasing, materials, etc

Mitigate Problems :

Pre-Construction Conference : Submittals: Request for Information (RFI):

Breakdown of Project Types :

Residential: 40-45% Commercial: 25-30% Industrial 5-10% Heavy Civil: 20-25% **These are the number of projects (volume) ** Industrial by far is the most expensive ($)

Surety Bonds vs. Traditional Insurance

Surety Bonds : - 3-party - risk transfer - duty to the obligee - regulated by state insurance departments - premium fee for prequalification services - project-specific - penal sum Insurance : - 2-party - risk transfer - duty to insured - regulated by state insurance departments - premium actuarially determined - usually, term specific - policy limits

Design - Bid - Construct

The traditional way of procuring construction

Procuring Contractors ?

Three approaches are used to select contractors - competitive bidding - negotiation - best value

Litigation

Traditional method: "See you in court" • Judge and jury • In public and expensive • Binding decision • Some appeal rights

Systematic Project Management :

Why? • Price and schedule are fixed • Projects are dynamic • Multiple moving parts • Complex final product

Joint Venture :

• A special purposed partnership • Partners may be: proprietors, partnerships or corporations • A separate legal entity Why JV? • Pool resources, pools management, obtain special skills and spread risk

Capital

• Ability to finance the project in conjunction with other projects in the work program

Offer and Acceptance

• Agreement occurs when an offer has been accepted • Both must be clear, complete and unconditional. Could be in: Writing Oral Implied by conduct • Mirror Image Rule: Acceptance must be a "mirror image" of the offer. • Offer is terminated if there is a counter offer, rejection, a revocation (backed out)

What is a Contract?

• An agreement that affects the legal relationships between two or more persons. • Restatement of the Law of Contracts: - "A promise or set of promises for the breach of which the law in some way recognizes a duty." • Uniform Commercial Code: - The "total legal obligation which results from the parties' agreement."

Payment Bond

• Assures owner that GC will pay selected laborers, subcontractors, and suppliers associated with the project - Protects against Mechanic Lien Mechanic's Lien • Subs can file lien within 3 months of last providing materials and services • Can place lien and sell property • What happens if the contractor defaults? - Surety pays damages to all demanding parties - Cost of Payment Bond is typically bundled with Performance Bond

Performance Bond

• Assures owner that GC will perform the contract - On time - On budget - According to specifications - Free of defective workmanship and materials within one year of completion • What happens if the contractor defaults on the project? Surety steps in to "cure" the problem or make payments out of the Performance Bond (1-5%)

General Partnership Reasons for Dissolution of Partnership :

• Bankruptcy • Duration in the Articles of the Partnership Agreement • Withdrawal of a Partner • Insanity of a Partner • Court of Equity Decree • Mutual Consent • Death of a Partner

Request for Information (RFI):

• Clarifies designer's intent (before contract is signed, e.g. issued from contractor to owner who archives and submits to design for clarification)

General Partnership Advantages :

• Concentration of assets (increased bonding) • Pooling of equipment and facilities • Consolidation of talents • Partners share in management responsibilities • Profit and loss are shared in proportion to the amount of ownership • Not a legal entity (pays no taxes - partners pay federal tax) • Partners are not considered employees (no income tax, FICA, unemployment benefits) In some cases, Partnerships can act as a legal entity: • Can own property • Can have employees • Can sue and be sued

Mediation Benefits/Drawbacks :

• Consensual process •Informal procedure; can take place at any time • Settlement revolves around the mediator's efforts • Need competent, motivated mediator •Disputing parties stay in control • Mediator does not make the final decision •No legal record of the settlement; confidential • Process is non-binding, unless the disputing parties come to a final agreement •Very high success rate (>90% resolved)

Corporation - Foreign Corporation

• Corporation is foreign in any place outside its state of incorporation • A foreign corporation must register with the Secretary of State in that foreign state Otherwise... • Contracts are unenforceable (no lien rights) • No access to courts • Limited liability of owners (stockholders)

Character

• Experience and reputation in fulfilling promises and obligations

Procurement and Construction

• From construction documents to the physical reality

Design

• From design characteristics to construction documents

Planning and Definition

• From owner need to definition of characteristics that will meet that need

Bid Bond

• If the contractor submitting the bid is awarded the contract, the contractor will: - Provide the required bonds, and - Sign the construction contract. • Failure to comply with this promise - what happens? Surety pays the penal sum (5-20% of bid amount)

Benefits of Surety Bonds- Contractors

• Increase the number of projects for which a contractor can qualify • Ensures payment protection for subcontractors, suppliers and laborers • Technical, managerial or financial assistance can be made available in certain circumstances

Capacity

• Knowledge, experience, equipment and planning abilities

Corporation :

• Legal entity under the name of a corporation. Classified as... • Public or private • Profit or non-profit • Foreign or domestic Corporation can: • Do business per its charter • Own real and personal property • Enter into contracts • Sue and be sued • Incur debts • Act as an individual

Meeting of the Minds

• Must agree on the fundamental terms of the contract. • Mistakes of Fact (result in no meeting of the minds) - Unilateral mistake or mutual error - Innocent misrepresentation - Fraud (false representation) - Fraud (deliberate failure to provide information) - Duress - Subject matter does not exist (fire, death, etc.)

Pre-Construction Conference :

• Owner, designer, GC, engineer, subcontractors, utility companies, etc. • Technical detail, products "or equals" • Pay estimates, communication protocols

Limited Partnership :

• Partner invests cash but does not share in operation or control of the business • Also called "silent" partner • Part owner (shares in profit and loss) • Liable only to extent of contributed capital

Corporation Advantages

• Perpetual life • Limited liability of owners (stockholders) • Easily aggregate large capital • Employees can be owners (profit sharing) • Fringes and retirement benefits more readily available

Competent Parties

• Persons entering into a contract must have the legal ability to do so • Exceptions: • Under 18s • Persons under the influence of drugs or alcohol • Bankruptcy • Company director who is acting "ultra vires"

Dispute Resolution Techniques

• Prevention •Negotiation •Mediation •Arbitration •Dispute Review Board •Mini-trial • Litigation

Dispute Review Board (DRB)

• Project-specific, three member panel •DRB created at start of project •DRB considers disputes as they occur •DRB stays current on project progress •DRB makes recommendations, not decisions • Disputes can be given further review or litigated

Benefits of Surety Bonds - Owners

• Provide a pool of qualified bidders • Reduce risk of liens and financial loss • Increase likelihood of timely project completion • Protect against defective materials and workmanship

Arbitration Benefits/Drawbacks

• Rules of evidence and discovery are relaxed •Arbitrators can be selected based on their experience •No public record of the decision; private •In AL, allowed at any time if arbitration clause is in the contract (except after trial) •Arbitration fees can be substantial •Arbitrator does not have to be correct on the facts or the law.

Change orders

• Scope and detail not defined in contract are changed by the owner to create extra work that needs to be compensated

Minitrial

• Simulated trial with less formal procedures • Before minitrial, disputing parties must agree to: • Procedures (location, timing, allowable evidence, witnesses, etc.) • Whether outcome is binding/non-binding • Party who will hear the case (judge/jury) •No public record (confidential)

Incorporation clause

• Subcontractor is obligated to the GC to the full extent that the GC is obligated under the Prime Contract. Subcontractor acknowledges that it has familiarized itself with all of the terms of the Prime Contract."

Legal Subject Matter :

• The contract must not break any laws • Legally binding contracts must be for legal transactions • Agreements to commit a crime will not be upheld in court

Indemnify:

• To protect or keep free from loss, to repay for what has been lost or damaged • Engineer responsible for damage (can exclude claims by third parties, can have a limited warrant that caps the damage to a set figure)

Consideration

• What one party gives to another • There must be some sort of exchange • It need not reflect the full monetary value of the item, but it must have some measurable value • "A cent or a pepper corn would constitute a valuable consideration." - Supreme Judicial Court of Maine, Whitney v. Stearns, 16 Me. 394, 397 (1839)

Documentation

• Written: Letters, memos, reports, meeting minutes, faxes, e-mail • Non-written: Meetings, phone conversations, drawings, sketches and photos

Merger clause

•"This contract constitutes the entire agreement between the parties and supersedes all prior negotiations, representations, or agreements, whether written or oral!"

Arbitration

•Dispute presented to arbitrators (one or a panel of three) for review and judgment •Hearings at convenience of arbitrator(s) • Process follows American Arbitration Assoc. rules • Cost is fixed fee or hourly rate • Can be binding or non-binding • Binding arbitration: No appeals allowed; arbitrator's judgment is final • Non-binding arbitration: Required in Oregon when court case includes damages greater than $75,000

Mediation

•Mediation process: • Mediator reviews case in general prior to the mediation session. • At the mediation session, the mediator hears brief arguments of disputing parties. • Disputing parties are separated. • Mediator shuttles between the parties to try to resolve the dispute. •Mediation takes one day to complete •Mediator charges a fixed fee • Cost is split between the parties