In our negotiation of construction management agreements for owners and developers, we have found that some overly aggressive counsel for the construction manager respond to our draft agreements with voluminous redlines, in part altering basic legal terms, such as indemnification or default and termination, and in part altering business terms, such as the scope of services, with the result that negotiations become protracted and costly for both parties, as a battle of redlines ensues.[1]
We are now taking the position (with client support) that, even before a draft CMA is prepared, the parties first agree upon a term sheet containing the basic business and legal terms of the CMA. Only then do we draft the CMA and request that, in lieu of a redline, the response to our draft be in memo form addressing the key issues. This issues list is then negotiated before a revised CMA is prepared and, once again, any open issues are set forth in memo form. After the remaining issues are resolved, the CMA is redrafted and final edits are made via redlines.
Examples of the types of key issues (and typical owner positions) sought to be negotiated before we provide a draft CMA are the following:
Form of Agreement
Owner will utilize its master form of CMA (non-AIA) with owner’s option to proceed on a cost plus or GMP delivery method.
Preconstruction Fee
Preconstruction services will be set forth in the CMA and performed on the basis of an all-inclusive monthly lump sum fee for the period commencing upon the execution of the CMA. The net fee portion of the preconstruction fee will be credited to owner against CM’s construction phase fee upon the commencement of the construction phase.
Fee and other Markups
The fee, to be expressed as a percentage, will be calculated on the cost of the work, to be defined in the CMA, exclusive of liability insurance and subcontractor default insurance. CM will provide its proposed fee and markups for insurance and SDI.
Retainage
CM’s fee will be paid on the basis of the net amounts due the subcontractors, after the withholding of retainage. Except as otherwise permitted in writing by owner, each subcontract will provide for a retention of payments equal to ten percent (10%) until (subject to owner’s approval), such subcontractor’s work is fifty percent (50%) complete, and thereafter retention of five percent (5%) will be withheld from payments through final completion of the work.
General Conditions and General Requirements
General conditions and general requirements costs will be paid by owner on an actual cost basis without markup, to a maximum amount to be determined (the “GC Cap”) and will be identified on a general conditions cost matrix attached to the CMA.
CM Contingency
A contingency in an amount to be negotiated will be available to CM if there is a GMP. The contingency initially will be calculated on subcontract and general conditions/requirements costs at the time of CM’s cost proposal. Trade buy savings will be transferred into the contingency. Sharing of remaining contingency will be negotiated.
Insurance
CM will either provide a Contractor Controlled Insurance Program (CCIP) or conventional insurance at rates to be negotiated. Conventional insurance will also cover insurance not included in the CCIP, such as automobile, professional or pollution liability insurance.
Change Orders
Change orders will include all costs associated with the change as well as CM’s fee, after a “dead band” (or fee holiday) in an amount to be negotiated, and CCIP and SDI costs. CM will be paid its actual general conditions costs in connection with changes.
Project Schedule/Liquidated Damages
A critical path method schedule with relevant milestone dates (including TCO issuance dates) will be provided with CM’s cost proposal. CM will be required to accelerate the work at its expense (but for which the contingency is available) if milestone dates are missed. In lieu of consequential damages for delay, after a grace period of thirty days, LDs in an amount to be determined will be assessed until substantial completion is achieved.
Warranty
CM will provide a general warranty of one (1) year from the date of the final completion of the work. The general warranty will be in addition to all subcontract warranties, which will be for the CM’s and owner’s benefit.
In addition to these business terms, there are several common legal issues that may prolong negotiations and we recommend that they be addressed during the term sheet/issues list process. Among these legal issues are indemnification, waiver of consequential damages, waivers of CM claims due to late notice, delays, continuous work during disputes, and assignment of subcontracts to owner upon termination of the CMA. Rather than waiting for an exchange of CMA drafts, the issues outlined above should be resolved at the outset of negotiations.
[1] While we are focusing on CMAs in this blog, this discussion can relate to all forms of construction and design agreements.
