Who's on the Whose Team with Alternative Delivery Methods?

By John S. Mrowiec

A traditional way of designing and building a project is the "design-bid-build" method. An owner hires an architect to prepare schematics, design development and construction documents.

When the construction documents are complete, the owner seeks bids from potential general contractors. Then, the owner selects a general contractor who would hire subcontractors and build the work as designed in the construction documents.

With the goals of decreasing the time to design and construct, achieving better constructability and lowering construction costs-or to establish a single entity responsive to the owner-alternative delivery methods have arisen. Among possible alternatives to "design-bid-build" are construction management, design/build and hybrids of those approaches.

Sometimes an owner might engage an architect and before the design is complete, assign the owner-architect agreement to a design-builder.

Thereafter, the owner still might be communicating with the architect about design intent, the budget and design changes.

From whom is the architect to take direction and who pays the architect's fees? That is a simplified description of the delivery method the parties attempted to use and the ensuing disputes in a recent project gone awry, City of Coralville v. FaulkerUSA, Inc., 2006 U.S. Dist. LEXIS 91819 (S.D. Iowa, Dec. 15, 2006).

The city of Coralville established the Coralville Hospitality Corp. as a nonprofit corporation to own and operate a to-be-designed and constructed Marriott hotel and conference center. The city and the operator solicited requests for proposals from developers. FaulknerUSA Inc. was the successful respondent.

It is impossible due to space limitations to describe fully, and without potentially erring, the "menu of contracts guid[ing] relationships" among the various parties, Coralville, 2006 U.S. Dist. LEXIS 91819, *6.

The operator entered into a "Memorandum of Understanding" under which the respondent agreed to design and build the project for a preliminary budget of approximately $57 million. The design/builder was to subcontract with an architect for the design pursuant to a fee schedule. Thereafter, the operator, not the design/builder, entered into an architectural design services agreement with an architect, Cole + Russell Architects Inc.

Suit Filed, Sought Public Bidding

A group of contractors filed litigation seeking to require public bidding.

Apparently to address the public bidding issue, the operator entered into a "Preconstruction Services Agreement" with the design/builder. Under that agreement, the design/builder would serve as a "construction manager," and the field construction work would be bid.

Under the preconstruction services agreement, the construction manager would earn a fee of $475,000 for preconstruction work "plus the direct cost of any related expenses of construction manager in connection with the performance of the preconstruction work," Coralville, 2006 U.S. Dist. LEXIS 91819, *61-62. That agreement attached a cost breakdown exhibit budgeting $2,242,000 for architectural and engineering fees. The Preconstruction Services Agreement permitted changes in the scope of the preconstruction work only by written change orders signed by the operator.

The Preconstruction Services Agreement listed a preliminary budget of $60,213,000 with contemplated future negotiations to establish a final budget within 5% of that figure. It also contemplated entry into a subsequent

"Construction Manager Agreement" with construction manager, after acceptance of the appropriate bid for the construction work, for construction manager to manage, but not perform, the field construction work.

As part of the Preconstruction Services Agreement, the operator assigned the Operator-Architect Design Agreement to the construction manager. At that time, the operator had paid the architect $955,233.

Even though there already was the assignment of the Architect Agreement, the construction manager issued a Letter Agreement to the architect authorizing the architect to proceed under a draft Design Services Agreement with fees not to exceed $1,770,779. The construction manager and architect began negotiating the Design Service Agreement and ultimately finalized its terms.

A portion of the project, excluding parking ramps and other items, was let for public bids. The construction manager had predicted prices of approximately $37 million for that project portion.

However, the three bids received ranged from $50 million to $54 million.

After some further attempts to achieve the budget, the operator terminated the construction manager. Ultimately, the city and operator engaged others to build the project.

The architect claimed $667,206 in unpaid fees from the construction manager.

The operator claimed $2.7 million from the construction manager for return of amounts previously paid the construction manager and its consultants.

Suit, Countersuit Filed


The city and operator sued the construction manager, and the architect sued the construction manager for the unpaid fees.

The construction manager denied that it must return its compensation and sued the city, operator and operator's representative for the fees being sought by the architect and sued the architect, too. The legal theories asserted by the parties were numerous.

After discovery, the parties moved for summary judgment on some of the theories on the various claims.

The Coralville decision is 138 pages. It involves such subjects as the construction manager's admitted failures to change the projected budget amounts in periodic reports to operator to address likely bids as the design status progressed, limitation of liability, pass-through, conditional payment, rescission of contracts and the consequences of construction manager's failure to request preconstruction services change orders. Absent from the Coralville decision was any discussion of any argument that the architect had failed to design within budget.

I am addressing only one of the issues raised by the chosen delivery system and the way the process occurred.

The construction manager argued that one of the reasons both the bid prices were over budget and the architect should not be compensated was that the operator had communicated design changes directly to the architect who incorporated the changes without the construction manager's knowledge or consent.

The construction manager contended the architect breached the Design Services Agreement by (1) "communicating directly with representatives" of [the operator] and the City [in a manner] "far beyond mere communications," and (2) "performing work as directed by the city and [the operator] without consulting with or seeking approval from Construction Manager," Coralville, 2006 U.S. Dist. LEXIS 91819, *130-33.

The architect moved for summary judgment on construction manager's claim.

The Design Services Agreement specifically contemplated that "the design process for the Project is collaborative" and that nothing in the Design Services Agreement was intended to limit the free flow of information among the architect, construction manager, operator, city, operator's authorized representative, Marriott, and the trustee [for bond financing]," Coralville, 2006 U.S. Dist. LEXIS 91819, *132.

The Coralville court cited that language in agreeing with architect regarding the construction manager's "direct communication" theory. Under the language of the Design Services Agreement, communication between the architect and operator was not a breach by the architect of its agreement with the construction manager.

Agreement's Language Key

The Design Services Agreement, though, contained additional language. That agreement gave the construction manager sole "authority and responsibility to issue comments to the [architect] that will be considered an approval of architect's deliverables, and "to maintain the Design Schedule and avoid unnecessary redesign efforts by [Architect], [Construction Manager] will be the single point of formal approval for [Architect's] Deliverables," Coralville, 2006 U.S. Dist. LEXIS 91819, *134-35.

The Coralville court read the "collaborative design" language together with the construction manager "authority" and "approval" language. While direct communication between the operator and architect was encouraged and permitted by the Design Services Agreement, the Coralville court made the distinction that "Insofar as [Architect] accepted any 'approval' of its

Deliverables by either the City or [the Operator] by incorporating the suggestions or requests without funneling these suggestions or requests through [Construction Manager] for approval, that scenario would constitute a breach of the Design Services Agreement," Coralville, 2006 U.S. Dist. LEXIS 91819, *137.

There was deposition testimony cited with a different motion which could be read as knowledge and approval by the construction manager of some additional services by the architect for integration of operator-directed changes. But because architect had chosen to challenge only the legal theory and not the facts as alleged by the construction manager, the court denied the architect's motion for summary judgment.

The construction manager may proceed to trial to attempt to prove the facts to support the claim that the architect breached by performing services in integrating the city's or operator's design suggestions (that might otherwise have been compensable additional services) without first giving the construction manager the opportunity to consent.

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.