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Janet B. Fierman
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Construction Law

CM at Risk - A New Alternative for Public Construction Projects

Thursday, April 09, 2009

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Public building projects are a significant source of construction activity in the Commonwealth of Massachusetts, particularly in these difficult economic times. Prior to 2004, most public entities were restricted to a design-bid-build delivery method for their projects, with both contract and subcontract awards subject to the public bidding requirements of M.G.L. Chapter 149. In 2004, however, the Massachusetts Legislature followed much of the rest of the country and enacted Chapter 149A to allow "construction management at-risk" (CM at Risk) as an alternative contracting method for public agencies. (Chapter 149A also allows design build contracts for qualifying public construction projects, but that is beyond the scope of this article.)

What is a CM at Risk project delivery method and why use it? The CM at Risk system allows public entities, under certain circumstances, to establish their own qualitative criteria for selecting a project's general contractor (known as the "CM at Risk contractor" or the "CM at Risk") and to award the contract based on those criteria. It also allows an agency to benefit from valuable services and guidance from its general contractor during the design process, such as cost estimation, consultation on constructability, preparation and coordination of bid packages, scheduling, cost control and value engineering. The CM at Risk may continue as the general contractor for project construction under a cost-plus owner/contractor agreement, so long as there is a guaranteed maximum price. However, the public entity may change contractors if it is not satisfied with the CM at Risk's guaranteed maximum price.

The CM at Risk statute has significant process mandates, however. It requires that the public agency go through a two tiered process at the general contractor level: (1) selecting a CM for assistance during design and pre-construction; and (2) negotiating the guaranteed maximum price amendment to the CM's contract when the construction documents are sufficiently complete and the project can be bid. It also has two-phase requirements for selection of trade and non-trade subcontractors that are similar to those found in the public bidding statute under Chapter 149 (see below). In addition, the statute mandates plans and procedures for communications coordination, cost monitoring and auditing, and acquisition of expertise to meet anticipated challenges. These processes, and others required by the statute, require formulation of criteria and procedures early in the project's development.

When is it available? The CM at Risk construction method may be used by a "public agency," which the law defines as "a department, agency, board, commission, authority, or other instrumentality of the commonwealth or political subdivision of the commonwealth." It is available on projects for the "construction, reconstruction, installation, demolition, maintenance or repair of any building" with an estimated cost of at least $5,000,000. An agency proposing to use the CM at Risk project delivery method must apply for and receive a Notice to Proceed from the Office of the Inspector General (OIG).

How is permission obtained? First, the agency needs to apply to the OIG for permission to proceed under the CM at Risk program. The application process can be burdensome, but with planning it need not impede the project. A word to the wise: the OIG will not accept a letter outlining the project and presenting the agency's general ideas for procuring and overseeing construction management services. The agency should use the OIG application form, which includes all of the statutory requirements and facilitates OIG review. Even if some of the information and document requirements seem excessive or immaterial for a given project, an incomplete application will not be approved.

What are the OIG Requirements? The OIG application requires general information about the project, including milestone dates and cost estimate breakdowns. It also includes the following statutory requirements:

  • Certification from counsel that the governing body of the agency has authorized a CM at Risk contract, with the results of any public vote attached;
  • Written evidence of the governing body's approval of the plan and procedures;
  • Written determination by the agency that the use of a CM at Risk contract is appropriate for the particular project, with the reasons for this determination;
  • Brief narrative and organization chart showing the roles and responsibilities of both agency employees and contracted individuals and entities with respect to the particular project;

Note: It is wise to carefully think through staffing and allocation of project tasks within the agency before responding to this requirement.

  • Contact information, qualifications, and experience for all key project team members;
  • Copies of the scope of services portion of the project manager's and designer's contracts; and
  • Detailed and comprehensive plans and procedures outlining the project team's ability to effectively procure and manage CM at Risk services.

Comprehensive Plans and Procedures?! Not surprisingly, the plans and procedures are the most complicated aspect of the application materials to be submitted. The underlying policy for this requirement is maintenance of a competitive procurement process that is administered fairly and openly. In evaluating an application, the OIG wants to know that the decision-making authority for the project is well-defined, that each team member's roles and responsibilities are clearly delineated and that each team member has appropriate qualifications for his/her role and responsibilities. The OIG also wants to ensure that the agency has provided an adequate framework for negotiating and selecting contractors, subcontractors and material men. Accordingly, the OIG requires that, prior to selecting a CM at Risk, the public agency seeking to use the program submit Plans and Procedures which include the following:

Two-phase CM at Risk Selection

  • Plan and procedures for conducting the two-phase selection process for hiring a CM at Risk firm and the methods that will be used to ensure fairness in competition, evaluation, and reporting of results at every stage in the procurement;
  • Plan and procedures for developing the cost-plus not to exceed guaranteed maximum price contract;

In selecting a CM at Risk firm, the agency is required both to establish a prequalification committee that formulates a "Request for Qualifications" and to establish valuation procedures and criteria. Based on responses to a Request for Qualifications, the committee then prequalifies at least three CM at Risk firms, from which it then solicits responses to a Request for Proposals. The agency's selection committee then ranks the prequalified CM at Risk firms based on the previously established criteria. Non-fee negotiations then commence, and if the agency is unable to establish an acceptable contract, it may move to the next highest ranked CM at Risk firm. Later, when design documents are at least 60% complete, the parties negotiate the guaranteed maximum price that is incorporated as an amendment to the contract. If the agency and the CM at Risk are unable to agree upon a guaranteed maximum price, the agency may attempt to negotiate with the next highest ranked CM at Risk firm. If those negotiations are unsuccessful, the agency must procure the project via traditional public bidding.

Subcontractor Selection

  • Plan and procedures for conducting the two-phase selection process for obtaining trade contractors and the methods that will be used to ensure fairness in competition, evaluation, and reporting of results at every stage in the procurement;

The selection process for subcontractors under the CM at Risk delivery method is quite similar to the public bidding process under Chapter 149. For trade contractors, a prequalification committee solicits responses to a Request for Qualifications and is required to prequalify each trade contractor who meets a minimum score based on statutory criteria. Bids from the prequalified trade contractors must be opened publicly and the trade contract is awarded to the lowest prequalified bidder as long as the agency receives at least three (3) responsive bids. If it receives fewer and the lowest bid exceeds the estimated cost for the work, the CM at Risk must attempt to negotiate an acceptable price with the lowest prequalified bidder. If such negotiations are unsuccessful, the CM at Risk must terminate those negotiations and initiate negotiations with the second lowest prequalified bidder. If the subsequent negotiations do not result in an acceptable price, the CM at Risk then must solicit additional bids pursuant to the agency's procedures for selection of subcontractors who are not trade contractors.

For subcontracts that are not trade contracts and have an estimated cost of $20,000, the agency must approve the required work qualifications and a list of subcontracting firms believed to meet those qualifications. Once the CM at Risk firm and the agency have settled upon the list, bids are solicited. The CM at Risk then selects a subcontractor and provides its reasons for the selection. Subcontracts with an estimated cost less than $20,000 may be awarded by the CM at Risk firm using any selection method approved by the agency.

Other Plans and Procedures

  • Plan and procedures relating to project administration and coordination and maintenance of project communications;
  • Plan and procedures regarding project cost monitoring and auditing; and
  • Plans and procedures for acquiring appropriate expertise to assist at times or for tasks where team members' experience may not meet anticipated challenges.

The OIG reviews applications to determine whether they satisfy the statutory criteria. Within sixty days of receiving an agency's application, the OIG will determine whether the agency application has met the requirements necessary to obtain a Notice to Proceed. If not, the OIG will notify the agency that its application is rejected and provide written reasons for the determination. The agency may re-apply with more or different information to address the OIG's concerns. If the OIG approves the application, it issues a Notice to Proceed.

Follow Up

The CM at Risk statute requires that the OIG issue a report on the use of the CM at Risk delivery method, including any recommendations, to the Legislature. Although the process itself may be modified, the CM at Risk delivery method will likely remain an option for public construction in the Commonwealth because, on the right project, it can make sense for all parties involved.

This article was intended to provide a general overview of the CM at Risk delivery method and should not be viewed as a comprehensive resource on the matter. The information may or may not be applicable to any given public construction project.

This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.