Governor Jerry Brown signed into law Senate Bill 328, which permits counties to enter Construction Manager At Risk (CM@R) agreements for construction of projects over $1 million. Counties now join the University of California, the California State University System, the Administrative Office of the Courts and other public entities which already have enabling legislation permitting them to enter CM@R agreements.

CM@R has become a popular project delivery method in the public sector as an alternative to the design-bid-build method, which is generally considered more likely to result in contractor claims. Under the CM@R method, a contractor becomes involved in design development, typically after the schematic design is completed, and assists the designer develop the construction documents. The contractor’s construction experience should result in a better design and a lower cost of construction. The contractor then acts as a construction manager on behalf of the owner to manage and cause the trade contractors to perform.

Sometimes the owner enters into contracts with the trade contractors. This is risky for the owner because it may have direct liability to one or more of those trade contractors for the construction manager’s failure to manage them. Sometimes the construction manager contracts with the trade contractors, which is better for the owner. Who contracts with the trade contractors determines whether the construction manager or the owner is truly “at risk.” The construction manager may also be “at risk” if it guarantees the cost of construction or the schedule.

In the absence of enabling legislation such as SB 328, there are risks to CM@R contracting for both owners and construction managers on public projects. As a general matter, many public owners are required to competitively bid construction contracts and award them to the lowest responsive, responsible bidder. However, public owners are not required to award design and construction management agreements to the lowest responsive and responsible bidder. They can award based upon an assessment of best value, with price being one of the considerations. Risk arises when a CM@R agreement is entered without statutory authority.

In 1970 the City of Inglewood and Los Angeles County created a joint powers authority to develop a civic center that would include both city and county buildings. The joint powers authority awarded a construction management contract to Swinerton & Walberg Co. (Swinerton) Swinerton was not the lowest bidder but was considered more qualified than the lowest bidder. Under the terms of the contract, Swinerton guaranteed the total cost of construction. The low bidder, which was not found to be non-responsible, successfully enjoined the joint powers authority from proceeding with Swinerton’s agreement.

In 1972 the California Supreme Court ruled in City of Inglewood – L.A. County Civic Center Authority v. Superior Court, 7 Cal.3d 861 (1972) that a construction manager contract that guarantees the total price of a project based on subcontractor bids “is too closely akin to traditional lump sum general construction contracting” to be exempt from competitive bidding requirements. Since that time, any public entity required to competitively bid construction contracts ran a substantial risk if it entered a CM@R agreement. It risked having its project enjoined and having the CM@R agreement ruled void. The CM@R risked having to disgorge all funds paid to it by the public owner.

With the enactment of SB 328, California counties and construction managers entering CM@R agreements with them can now avoid this risk and enjoy the benefits of CM@R. However, they must carefully allocate between themselves the risk of liability to the trade contractors.