You be the judge

FACTS: When the Worcester State Hospital psychiatric facility was being built in Worcester, Mass., the state’s Division of Capital Asset Management and Maintenance (DCAM), the project’s owner, entered into a contract with an architecture firm to prepare the project design.

When the design was partially complete, DCAM entered into a Construction Management at Risk (CM at Risk) contract with a construction firm as the construction manager at risk (CMAR). The CMAR subcontracted certain electrical work to an electrical contractor. Before completing its work, the electrician submitted a change order request to the CMAR, seeking to increase its subcontract price to cover additional costs allegedly resulting from certain delays and deficiencies, including design errors. The change order request was denied.

The electrician later filed suit against the CMAR, alleging breach of the subcontract based on alleged scheduling, coordination, management and design errors. The CMAR consequently filed a third-party complaint against DCAM, alleging, in essence, that DCAM should indemnify the CMAR for damages caused by design changes and design errors that were not the result of any wrongdoing by the CMAR.

ISSUE: Does the owner of a CM at Risk construction project give an implied warranty regarding the designer's plans and specifications in the same way that the owner does in a traditional design-bid-build construction project? Coghlin Electrical Contractors, Inc. v. Gilbane Building Company (Massachusetts Supreme Judicial Court)

Ruling

The trial court, ruling on DCAM’s motion to dismiss the third-party complaint, determined that DCAM could not be liable to the CMAR because the owner’s implied warranty that plans and specifications are adequate for the job does not apply to a CM at Risk contract.

The Supreme Judicial Court vacated the trial court’s order, holding that a project owner’s implied warranty regarding the designer’s plans and specifications can apply to a CM at Risk contract.

Design-bid-build vs. CM at Risk model

The court addressed the differences between the traditional design-bid-build project delivery method and the relatively new construction management at risk method. In the design-bid-build method, the owner retains a design professional to design the project. When the design is complete, contractors submit bids containing a price to build the project as depicted in the design documents, and the owner impliedly warrants the sufficiency of the plans to build the project. Unlike the design-bid-build method, the CM at Risk model allows the owner to contract with a CMAR before the design is complete, and the owner may invite the CMAR to collaborate in the design phase of the project.

Despite the differences in the two project delivery methods, the court noted that in the CM at Risk model, as in the design-bid-build model, "the owner, through the designer, ultimately controls the design and is the final arbiter of it." The court also suggested the owner "may be able to transfer liability to the designer" and noted that the designer on a public construction project is required by statute to maintain certain levels of professional liability insurance coverage.

Considering the CMAR’s limited role in the design phase of the project, the court concluded that a CMAR may benefit from the implied warranty only where it has acted in good fact and acted reasonably in light of its own design responsibilities. That limitation may make it difficult for a construction firm in the CMAR role to prevail on a design-related claim without a full trial, as whether a party acts "reasonably" is often a disputed issue of fact.

The Coghlin decision clarifies the role of the CMAR and, as to owners and designers, allocates to them substantially the same design risk with which they are familiar in the traditional design-bid-build setting.

TAKE AWAY: Notwithstanding the collaborative elements of the CM at Risk method, owners and design professionals in CM at Risk projects should expect claims when design issues arise, just as in design-bid-build projects.