Surety Best Practices: When Third-Party Construction Manager are Involved

Who me? Couldn’t Be! – Third-Party Construction Managers

Third-party construction managers (CMs) retained by a project owner to oversee a project on their behalf play a crucial role on many construction projects. The CM represents the owner’s interests in the project, and often makes daily decisions that will affect the project’s outcome. While most contracts require that the CM be a neutral decision maker, it is important to keep their interests in mind, and especially who is paying their invoices.

Construction managers are a diverse group with different roles and responsibilities. They can be categorized into several types based on their functions and project delivery methods. The two most common types of third-party construction managers are:

1. Construction Manager at Risk (CMAR): This type of CM assumes financial risk for the project, often guaranteeing a maximum price. They are involved early in the design process and provide input on cost and constructability.
2. Construction Manager as Agent (CMA): This CM works on behalf of the owner without taking on financial risk. They focus on project oversight, scheduling and coordination and do not handle contracts with subcontractors directly.

In this post, we discuss

• The role of a CM when a project goes into default
• The various tactics that a CM may employ to protect the owner’s interests – and their own – to the detriment of the project
• Strategies that sureties can take to reduce the potential disruption a CM can cause

CMs and Projects in Default

Regardless of type, the role takes on additional complexity when a contractor defaults on a project, as it is very possible that the CM played a role in the default sometimes directly contributing to its cause. In the event of a surety takeover, this same CM often remains on board, continuing to represent the owner’s interests.

The CMs motives may vary, but once a surety is involved, they all have one thing in common: they manage a distressed project. In most cases, the CM’s actions, especially in providing adequate supervision and oversight, carry significant weight and may have led to errors, delays or quality issues, which factored in the contractor’s original default. The decisions and actions of the CM in this critical phase will significantly affect the surety’s ability to complete the project and mitigate costs.

Tricks of the Trade: CM Actions to Watch For

While not always the case, some CMs can be bad actors, especially when they recognize that their actions may have contributed to the default. In these cases, the CM sees a surety takeover as a chance to reset the project and redeem themselves. The CM will remove themselves from any responsibility for approvals or decisions made in the interim, i.e. before the surety gets involved. If the CM prioritizes its objectives over the completion contractor’s needs or project goals, the friction created may undermine the work that needs to be performed.

When this occurs, the CM usually takes a rigid approach to project management, which can hinder the ability to adapt to changing conditions or project requirements, limiting the surety’s options. The way the project was run previously no longer exists, and only the surety’s full compliance with the contract documents is acceptable; this course of action is often referred to as weaponizing the contract documents. When a construction manager “weaponizes” contract documents, it typically means they manipulate, misinterpret, cherry pick or exploit the contract terms to gain an unfair advantage or to control the project to their benefit.

Here are some ways this approach can manifest:

1. Abusing contract terms: The CM may enforce specific contract clauses selectively, applying them only when it benefits their position while ignoring other provisions that could support the surety’s position.
2. Ambiguous language: If the contract contains vague or ambiguous language, the CM might interpret it in a way that favors their interests, leading to disputes and delays.
3. Change order manipulation: The CM could misuse the change order process to push through unnecessary changes, inflating costs or timelines under the guise of contract compliance or denying proper change orders as a way to force the cost of changes onto the surety.
4. Delayed documentation: Withholding or delaying necessary documentation (like schedules or progress reports) can create a lack of transparency, making it easier for the CM to justify delays or additional costs.
5. Leverage over subcontractors: The CM may exploit contract clauses to exert undue influence over subcontractors, creating a power dynamic that complicates project management.
6. Refusal to negotiate: A rigid contract interpretation can prevent productive negotiations, making it difficult to resolve issues collaboratively. The CM will also use this tactic to demonstrate to an owner that they are “tough” on the surety.
7. Exploiting liquidated damages: The CM might leverage liquidated damages clauses to impose penalties or pressure the surety or other parties into unfavorable decisions.

Surety Responses to Ensure Project Success

Mitigating the potential adverse effects of a construction manager involves several strategic approaches:

1. Thorough contract review: Conduct a detailed review of the contract documents before the takeover to identify any ambiguous language, potential loopholes or clauses that the CM could exploit. Utilize the Takeover Agreement to clarify some of the ambiguous or unfair clauses. Implement regular project audits to assess compliance with contract terms. This includes reviewing financials, schedules and documentation to ensure adherence to the agreed-upon terms.
2. Encourage a partnering approach: Collaborate with the CM as early as possible. Involve the CM in planning discussions to leverage their insights while ensuring alignment with surety objectives. Fostering a culture of collaboration where the CM is an integral part of the team and able to contribute to new ideas and changes in the project scope will provide the CM with a sense of ownership of the project.
3. Defend your rights: While developing a partnership with the CM is important, it is also vital, from the very start, to ensure that the CM understands that the surety will not be bullied. This sets a tone that will help mitigate inappropriate actions by standing up to any misrepresentation or manipulation of the contract terms. Know the escalation procedures outlined in the contract. If issues cannot be resolved, follow the appropriate steps stipulated in the agreement.
4. Document every conversation: Good record keeping is a hallmark of any successful project. It is crucial to keep a communication log, recording all conversations and interactions with the CM. By keeping thorough records, the surety safeguards the interests of all parties involved. Detailed records ensure everyone is on the same page regarding decisions and actions that will be taken. This helps prevent misunderstandings and holds parties accountable for their commitments. In disputes, this can be vital in legal contexts or negotiations.
5. Stay professional: While staying professional may seem obvious, it is easy to lose control under stressful circumstances, especially when dealing with a construction manager who is seen as an obstructionist. Focus on the facts and avoid personalizing the situation. Keep discussions centered on the project and specifications rather than emotions. Frame discussions as opportunities for collaboration rather than confrontation. Propose solutions that adhere to the contract terms while meeting project goals. Remember this rule of thumb: Do not write or say anything that could be harmful if it were to be repeated during negotiations or legal actions.

Dealing with third-party construction managers who misuse contract documents can be challenging. By taking these steps, sureties can better navigate conflicts with third-party CMs and work towards a more collaborative environment.

For more information on watch to for and best practices when engaging with a construction manager to ensure the successful completion of project when a contractor has gone into default, please contact Nick Deeley or reach out to us at +1.888.298.5162 or submit an inquiry.